America's CAR-MART Inc (CRMT) 2009 Q3 法說會逐字稿

Good morning, everyone, and thank you for holding.

And welcome to America's Car-Mart's third quarter 2009 conference call.

The topic of this call will be the earnings and operating results for the Company's fiscal third quarter ended January 31st, 2009.

Before we begin, I would like to remind everyone that this call is being recorded and will be available for replay for the next 30 days.

The dial-in number and access information are included thin 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 -- some of the -- As all of you know, some of management's comments today may be included in 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 provisions 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 1, Part 1 of the Company's Annual Report on Form 10-K for the fiscal year ended April 30th, 2008, and its current and quarterly reports furnished to and for the Securities and Exchange Commission on Forms 8-K and 10-Q.

Participating on the call this morning are Skip Falgout, Car-Mart's Chairman of the Board; Hank Henderson, the Company's Chief Executive Officer and President; and Jeff Williams, Chief Financial Officer.

And now I would like to turn the call over to the Company's Chairman of the Board, Skip Falgout.

Good morning, everyone, and thank you for joining us.

We are pleased to announce this morning that we have reported net income rose 8% to 3.6 million or $0.31 per diluted share, and that's $0.37 excluding a non-cash $0.06 reduction for change in fair value of interest rate swap for the third quarter of fiscal 2009; and that's versus 3.4 million or $0.28 per share for the prior period quarter.

Overall revenue growth is 3.3% and same-store revenue growth is 2.9%.

On the credit and collection front, our provisions for credit losses decreased to 22.4% of sales in contrast to 23.4% for the prior year quarter.

And Jeff will have additional credit information and add some background to those percentages in just a minute.

We experienced strong cash flow during the quarter, which resulted in a decrease in our debt of 1.6 million to 36.2 million at quarter end, and a 5.7 million increase in financed receivables, as well as a $500,000 increase in capital asset additions.

As Jeff will also discuss in more detail later, we expect cash flows to continue to be strong in our fourth quarter, as we receive special payments on our Zero Down plan for customers during the -- for tax refunds.

Again, these are solid results that are a reflection of our successful execution of our Buy Here/Pay Here business.

You know, we get asked a lot by investors, analysts, reporters, how can Car-Mart be so successful when most other automobile related entities seem to be in such dire straits nowadays?

Well, there are at least three reasons.

One is that our core customer base has always been challenged financially, so these bad times are nothing that we haven't been dealing with since 1981.

Second, our Buy Here/Pay Here model is especially well-suited to be successful if properly executed in both good times and bad, as we have proven consistently over our 27-year history.

And third, we have the Car-Mart advantage, which includes our people, our systems and infrastructure, our size and financial capability, and our single-minded, disciplined approach to satisfying our mission and vision.

During this call and over the coming weeks and months, you will hear us talk a lot more about these advantages, particularly the strategic and operational improvements we have made and are continuing to make as we grow our business.

Now I'm going to turn it over to Jeff to get into the financials.

Thanks, Skip.

As mentioned in the press release, our top-line revenues for the quarter increased by 3.3% compared to the third quarter of last year.

The increase was the result of a 4.1% increase in our average retail selling price, a 4.3% increase in interest income, offset by a .5% decrease in units sold and a $200,000 decrease in wholesale sales.

Same-store revenue increased by 2.9%.

Given the significant negative macro economic issues, we are pleased with the 3.3% top-line growth for the quarter.

Our down payment percentages for the quarter was 4.4% this year compared to 5.2% for the third quarter of 2008.

This equates to approximately $500,000 less cash received for regular down payments during the quarter.

The lower down payments were expected and were the result of the expansion of our Zero Down tax promotion which began in November of 2008.

This promotion is in effect a deferred down payment program, as we schedule special payments to coincide with actual tax refund receipts for our customers.

We do not count these special payments in our down payment percentages; but when received, they typically exceed our normal down payments.

Through February, we have already collected approximately 3.9 million of these special payments which pushes the true third quarter down payment percentage collected to above 10%.

In the prior year, we had collected only about 1.8 million in special payments through February, which equated to an approximate 8% true collected down payment percentage for the prior year third quarter.

We do expect to collect most of the remaining special payments in March and April, which will push the ending down payment percentage associated with all Zero Down sales even higher -- maybe as high as 13%.

In the prior year quarter after receipt of all special payments, our true ending down payment percentage ended up right at 9% for the third quarter.

So we do expect to finish this year significantly higher after receipt of all the tax refunds.

Higher down payments, including deferred down payments, are extremely important and have a significant positive effect on the individual loan as well as overall pool performance.

In looking forward, we currently expect our regular down payments in our fourth quarter, which began on February 1st, to be higher than the third quarter and slightly higher than last year's fourth quarter, which was 7.5%.

Once again, every dollar we collect on down payments is one less dollar we have on the street, which has a significant positive impact on our cash-on-cash returns.

In addition to the down payment, the average loan term is very important to the ultimate performance of the portfolio.

Shorter loan term reduces the time period our money is on the street and increases the frequency of sales to our repeat customers, both positive factors for pool performance.

For the quarter, our average initial loan term was approximately 26 months, which is up slightly -- approximately one week -- from the 2008 third quarter, but actually lower than the first and second quarters of this fiscal year.

This is an indication that our lot managers are doing a good job of keeping the term in line, even in face of increasing prices.

Proper utilization of a special payment is a tool used to keep the overall term down.

The average retail sales price increased 4.1% to $9,166, from $8,808 in the third quarter of fiscal 2008.

Sequentially, the average retail sales price increased to 2.8% after remaining relatively flat for the first and second quarters of this fiscal year.

The sequential price increase of the third quarter is consistent with historical experience, as vehicle purchase prices tend to increase based on increased demand during the income tax refund season.

Additionally, a slight mix shift, as well as improvements in quality factors such as age and mileage, contributed to the increase for the sequential quarter.

We are keenly aware of the importance of maintaining affordability for our customers.

We are working hard to keep the average selling price as low as possible, while at the same time supplying our customers with the vehicles they desire at the quality levels they have come to expect.

Demand for used vehicles we are purchasing remains high, as new car sales continue to struggle, crimping supply; and at the same time, our market continues to expand.

As we have mentioned in previous calls, going forward we will continue to work very hard to keep our car costs down to maintain affordability for our customers and enhance our cash-on-cash return percentages.

The average retail units sold per month per lot for the quarter was 25.3 compared to 24.9 for the third quarter of 2008.

We continue to focus on pushing this number up above 30, where it had historically been prior to our significant lot count expansion.

Once again, we continue to believe that all of our dealerships -- but mostly our newer dealerships -- have significant leveraging opportunities.

We have capacity to increase sales volumes, GAAP profits; and most importantly, real cash-on-cash returns going forward.

Interest income was up 4.3% for the quarter, as average finance receivable balance was up about 34 million, offset by a decrease in the overall effective interest rate to 11.4% from 12.9% for the prior year period.

This decrease is the result of decreases in the Federal Primary Discount Rate, the base rate used for loans generated in Arkansas.

The maximum rate allowed in Arkansas is the discount rate plus 5% -- or currently 5.5%.

The rate in Arkansas has steadily decreased beginning in August of 2007 when it was 11.25%.

The weighted average rate -- the weighted average interest rate at January 31, 2009 for all Arkansas loans was approximately 7.4%.

For the third quarter of this year, our gross profit margin percentage was 43.1% of sales, down slightly from 43.2 in the third quarter of last year, and up from 42.8% sequentially.

Pricing efficiencies and slightly lower expenses have allowed us to maintain gross margin percentages in the face of increased purchase costs.

We will continue to focus efforts on holding down purchase costs and repair and transport costs, and do expect to see gross margin percentages around a 43% level on a go-forward basis.

In the third quarter of this year, SG&A as a percentage of sales decreased to 18.9% from 19.2% in the same period last year.

The overall dollar increase for SG&A related primarily to higher payroll costs, a large percentage of which related to performance-based incentive compensation at the lot level.

Once again, we will continue to review our infrastructure to ensure we have adequate support for our associates in the field; but feel that at the current volume levels, we have a good solid structure that can continue to be leveraged.

For the current quarter, net charge-offs as a percentage of average financed receivables was 6% compared to 6.9% for the prior year's quarter.

Collections as a percentage of average finance receivables decreased to 16.3% from 16.6% for the prior year.

The decrease in collection percentage between years relates to a large extent on the slightly longer originating term with slightly higher average weighted average months to maturity, offset by a lower effective interest rate, and equated to approximately $700,000 less in cash receipts during the quarter.

As mentioned, cash receipts -- especially those associated with the Zero Down tax promotion -- were strong in February, which will serve to offset the slightly lower receipts in the third quarter.

At this point looking forward, we currently expect our overall collection results for the entire year to be strong.

These results, of course, will continue to be somewhat dependent on the success of finalizing collections on our Zero Down promotion, as well as our general managers' ensuring tax refunds outside of the Zero Down promotion are utilized effectively in managing individual accounts.

At the end of January, our 30-plus past due account were at 4.5%, compared to 3.7% at the end of January 2008, representing about 1.8 million additional dollars.

Again, by working with customers during tax refund season, we have been able to bring the 30-plus percentage back down to less than 3.5% at the end of February.

Our allowance for loan losses remains at 22% of receivables at January 31, 2009.

The provision for credit losses was 21.8% of sales compared to 22.8% for the third quarter of fiscal 2008.

We have seen solid improvement in our credit losses thus far this year, and are very proud of the efforts of our associates in the field.

Static pool performance for recent loans has been good, and we attribute the improvements to better cars, better underwriting, and better collection efforts.

We saw strong overall cash flows again during the current quarter, reflected in the $1.6 million reduction in our total debt.

Our total debt stood at 36.2 million at the end of January.

With the significant disruption in the debt markets over the last several months, we are even more proud of our healthy balance sheet, and are well-positioned to continue to grow from internally generated cash flows and increases in our revolver if needed.

At January 31, 2009, we had 24.4 million in additional availability under our credit facility.

Since we still do not have a clear picture of what the credit environment will look like in the future, we want to continue to ensure we maintain adequate availability, so as to not be in a position of having to slow down growth, as we have seen others in our industry have to deal with.

We will continue to consider buying back stock under our repurchase plan; but our foremost concern currently is ensuring that we have adequate funding to grow our business well into the future, which will benefit our shareholders over the long term.

We will continue to view any future investment decisions from an economic profit perspective.

Our current debt-to-equity ratio of 23.4 and our debt to financed receivables ratios of 15.8 are very low and a testament to our commitment to maximizing cash flows.

During the third quarter, we did have a $0.06 per share non-cash charge related to a change in the fair value of our interest rate swap, which was entered into in May of 2008.

The agreement provides that the Company pay interest on a $20 million notional amount at a fixed rate and receive monthly interest on the notional amount at a floating rate based on prime.

This change in fair value was caused by a number of factors; but primarily resulted from significant decreases in interest rates after May 2008, and particularly during the third quarter.

The Company intends to hold the interest rate swap until maturity, which is May of 2013.

The charge, which resulted from the change in fair value, will completely reverse itself by the maturity date.

Changes fair values will continue to be recognized quarterly as non-cash charges or gains, as the case may be.

We do not expect to see fluctuations in the future at the levels we've experienced during the third quarter.

Now I will turn it over to Hank.

All right, thanks, Jeff.

Well, we are very pleased with our results this quarter, and particularly with regard to the success of our annual Zero Down promotion.

The improved results of this promotion are an excellent example of what happens when best practices are identified and effectively put into place throughout the Company.

More structured procedures were implemented with regard to both the assistance provided to our customers and with the processing of their tax returns, and as to how the special payments were scheduled and tracked.

We believe we also made progress with our overall promotion of this campaign as well, and with our advertising.

As Jeff has already explained, these combined improvements resulted in not only increased sales specifically related to this promotion, but significantly improved cash flow as well.

We are now beginning to move out of the traditional tax deal sales and into a time where seasonally sales have tended to dip somewhat; and in an effort to minimize the slacking of sales and to continue to carry this momentum forward, we are transitioning from advertising our tax season promotion to a more value-driven type of campaign.

Our new advertising that will start in about a week is pretty much a "we're still here" message, highlighting the fact that while many more people cannot qualify for a car loan today as a result of overall credit tightening, we're still here providing financing to good hard working folks just as we have since 1981.

In addition to this advertising, we'll be running an on-lot down payment assistance promotion which effectively provides some relief on the required downs to customers based on time on the job, residence time, et cetera.

We have had good success with similar style promotions in the past, and we do anticipate it to be effective in continuing to drive traffic to maintain solid sales levels.

As has always been a vital part of the growth of Car-Mart, we continue to expand existing locations as opportunities present themselves.

This past Friday, I attended a grand opening of our new North Little Rock facility, which was relocated to a much higher traffic area, and I could not be more pleased as to how well this new property turned out.

It's truly very, very impressive.

Each time we construct a new building, we try to figure out how to make it more efficient than the last, and the improvements are very evident with this latest project.

The key factor of an expansion project such as this is not only to accommodate and better manage the store's present level of sales of customers, but our expectations of substantially increasing sales in a particular market.

Earliest indications are that this was an excellent decision, as traffic on this lot has immediately increased dramatically since we moved in.

And this week, we began to move into our new facility in Muskogee, Oklahoma, and it's very, very similar to our new North Little Rock location that I just mentioned.

Our customer base in Muskogee has grown quite a bit over the last few years, and we have been busting at the seams.

We're moving into a larger building with a much larger display area and much higher traffic count.

With the improved location and larger, more attractive facility, we obviously expect sales to increase.

And additionally, we expect to realize some other improvements, as the layout of this particular new office is both very customer-friendly and the collection department is particularly set up much more efficiently than we had at the other location.

As we have discussed on previous calls, our focus this year has been much more on realizing more the capacity of existing stores than on new store openings.

We do, however, presently have three new store projects underway at this time.

The satellite lot here in Northwest Arkansas that I believe we discussed on the last call, it is under construction and we're pushing to have it finished and operational by our April 30 year end.

We will be adding new lots in both Oklahoma and Missouri within the next few months, and we could potentially have each of those up and running by the end of May to start off our next fiscal year.

Critical to the success of our new lot opening is our management training program, where we recruit potential new GMs and train them in all aspect of the business.

The number of trainees in the program is up from just six months ago; but more importantly than the number, it's the quality of the people that we have in the program at this time.

Overall in this program, we believe that that's where the real improvement has been made.

Speaking generally, they're more qualified, more experienced, and possess a higher desire to become a Car-Mart general manager.

Our Associate Development department has made great strides in more effectively recruiting new general manager candidates, as well as providing improved training and development.

In addition to our management training program -- and actually really an extension of it -- is our assistant manager position.

Ideally, this position is a springboard for future general managers.

Through growth of individual stores this year, we've increased the number of these assistant manager positions, putting us presently at 49.

With the growth of these ranks, our bench strength is beginning to look better than ever.

I would probably be remiss if I did not share with you that there is one particular aspect of our business that we're presently taking a very hard look at, tweaking every day, and that is our average purchase price.

And as Jeff had mentioned earlier, our basic objective is to provide affordable basic transportation to our core customer, while at the same time, offer a step-up type vehicle for certain repeat customers to retain their repeat business.

Also in an effort to attract more of those customers who find themselves now as Buy Here/Pay Here customers as a result of recent credit tightening and have higher expectations than the lower end vehicles.

And obviously, all the while we're trying to maximize sales levels without lowering underwriting standards; and doing so in a time where local wholesale market prices fluctuate weekly.

Finding that right level and right mix at each store is an extremely important factor in assuring continued growth within individual markets.

We forever search for that sweet spot, as it is a moving target; and this is a big part of present discussions around here.

Throughout the upcoming months, we'll likely be lowering the average cost in certain markets while raising it in others as part of this effort, with our collective goal to bring it down somewhat over where it has been in recent months.

Over the past few years, we have made significant improvements building up the necessary infrastructure to carry us forward.

We've assembled a very talented team directing each aspect of our business in recruitment, training, purchasing, sales and collections.

We're also confident we have a more solid and mortal talented group of general managers and area operations managers today; and our immediate task at hand is to now bring it all together, so that we can realize more of our true growth potential.

So that concludes our prepared remarks, so now we would like to move on to your questions.

Operator, if you can help us with that.

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 session.

(Operator Instructions).

Your first question comes from Ken Green with Boston American.

Great quarter, fellows.

Hey, Ken, hadn't heard from you in a while.

I'm still here.

Anyway, given the differences in economic conditions around, there was an article recently that Arkansas was holding up a little bit better.

And could you compare contrast regions?

I know you're pretty big in Texas -- have a lot of new stores down there, and that's the oil industry; and with Arkansas, the higher rates, I just wondered if you're seeing any changes in geographic sections of the country?

I wouldn't say so many of the macro factors affecting us in the different parts, differently from one to another.

I mean, we're primarily small towns across the south that tend to be very similar.

However, in maybe -- I don't know if Jeff wants to speak on it or not -- but specifically Texas, as you mentioned, we've made a lot of improvements there.

Things are doing -- we're doing much better there, but I think that's moreover has to do with all -- a lot of just internal changes, more efficient management that we've made.

You know, from an employment standpoint -- and Jeff has some information about that -- but basically what we've seen is most of the areas we're in are below the national averages on unemployment, better than most; but again, you go back to some of those areas where they're higher than the national average, but they've always been higher, such as southeast Arkansas, (Inaudible) and Pine Bluff, and we continue to do well there.

But generally speaking, the areas we're in, employment is better than the national averages, although it certainly has creeped up a tad.

Then a quick follow-up question.

Given tighter credit, you cited that you are going to get a few more customers that normally might have gone into a dealer or something like that.

How about your own credit?

I mean, has tighter credit caused any -- to America's Car-Mart, or have you a collection of banks or credit facilities still open to you at the same level as you were before?

Yes, we currently have about $24.5 million of excess availability on our revolving credit facilities, so we're in good shape in terms of capital.

We have a good group of banks in our lending group.

They're all in good shape financially; so we feel good about our side -- or our situation, as far as the credit side of the business.

And Ken, we extended that credit facility back in December, I guess it was, Jeff?

To April 10th.

April 2010.

Thank you, thank you.

Thank you.

Your next question in the queue is from Bill Armstrong with C.L.

King and Associates.

Good morning, nice quarter.

Thanks, Bill.

The average selling price above 9,000, you mentioned that you have a slightly higher percentage of higher priced cars in your mix.

I was wondering if you could just flesh that out.

Are these for -- kind of targeted towards those new customers who are migrating down to the Buy Here/Pay Here space, and is that -- is that coming in as the expense of maybe fewer cars on your lots for your traditional customers?

Not really.

We've always maintained a number of those, and primarily we view those for stepping up the good repeat customer.

I will tell you that as we have gone through the tax time and obviously anticipate a higher sales levels, we have increased our inventory overall.

We really had some of the higher -- highest levels of inventory on a unit basis we've ever had.

Along with that, we did decide to step those up a little bit more, and that was just -- for a couple of reasons.

One is certainly to try to gain the attention of more of those customers that are now in this market; but really, they're traffic drivers -- they're what we call our draw cars, sitting up there on the front row to help just increase traffic.

We had increased that somewhat.

We're getting through this particular promotion.

We'll be bringing it back down a little bit; but the fact that we carry those is not really anything new to us at all.

We just have carried a little more of them than typical.

Okay.

Is that mix having any impact on your gross margin?

I know historically, higher priced cars have given you a little bit less of a margin and lower priced cars a higher margin.

We've done a good job with the expense control and pricing efficiencies to offset some of that bump-up in the cost.

So we've been able to maintain around that 43% gross margin percentage and expect to stay there, at least over the short term going forward.

And then as Hank mentioned, if we can somehow hold these costs steady, or actually after slight decrease in costs, then we do have potential to maybe gain some basis points on the gross margin line.

Okay.

And that reminds me about -- in your last call, three months ago, you did mention that the typical bump-up in prices -- in wholesale prices -- that you would normally have seen in the late fall was not materializing, because I guess a lot of competitors are having trouble financing purchases.

Did you see that throughout the season, or did you see prices finally start to show a seasonal increase?

Yes, as we really got into the actual tax sales, most definitely there was more competition out there for a good quality lower end car.

I think in years past, what we have seen is that it's happened a lot earlier, and we didn't see the early spike that we normally do; which obviously that helped us, but as we really got into it, yes, the pressure came on as always.

And we did -- during the third quarter, we did buy a slightly better car, as far as fewer miles and a little younger in age, so that did contribute to some of the price increase, too.

Okay.

And then my last question just has to do with new stores.

It looks like you opened one during the quarter -- during the third quarter.

Is that correct?

Yes, that's right.

Okay, and should we expect one for this quarter?

And then what should we look for, for fiscal 2010?

As I mentioned, we have three in the works right now, and the timing is going to be close on all three of these.

There may be one of those we have open at the very end of this quarter with the other two coming on shortly after the first of our next fiscal year.

Got it.

Okay.

Thanks.

Thank you, Bill.

At this time, I have no other questions in queue.

Okay.

Would you like to go ahead and take another question, sir?

I do have another one that just showed up.

Yes, yes.

Sure.

It's Ken Green again with Boston American.

Go ahead.

Just one quick follow-up question, Skip or Hank.

What do you see on a competitive front?

Is there the same old, same old?

And, you know, what about regional movement of some of these auctions?

But is that most a wholesaler outfit?

Yes, that's definitely the wholesaler outfit, but that is a very good question.

I will tell you that when things really started through the fall, starting to get tight, we -- I think everybody anticipated seeing more competition going out of business, and truly we haven't seen that as you really look at it on a local level, the competition.

That may change as the year goes on, but our competition is still there.

Ken, part of the competition is actually coming from the new car dealers.

They're not making much money on new cars and some of their used car operations.

Hank was telling me yesterday, we've seen some pricing for used cars that are kind of at our level from a new car dealership.

Yes, that's an interesting question, because a lot of times they wouldn't keep a lot of cars on their lots.

They'd send them out to the auction.

Maybe they're keeping more cars on their lots from the trade-ins, whatever, because of the new car sales slow down.

Absolutely.

We're seeing that without question.

And does that cause you -- I mean, I know you buy some from those people.

Does that cause you a little bit less availability for you?

You know, it makes us work a little harder.

Actually, talking with one of our most tenured buyers last week, and yes, we're in a -- again, we in the smaller towns, and when a couple of the local dealers are hanging onto more there's a little fewer there.

We've done a good job of sourcing our cars -- have an adequate number of cars has not been at issue for us really.

It just -- maybe it makes us roll up our sleeves and work a little harder.

But we're continuing to source our cars just fine, but that can make it a little bit more of a challenge.

For Skip, I'm going to follow up with a call, because we're going to be down your way again, and so we may be able to hook up with you.

Look forward to seeing you, Kent.

Okay, thank you.

Thank you.

Looks like we do have another question from Bill Armstrong with CL King & Associates.

Just a follow-up.

Last year, obviously, you had huge comps in the fourth and the first quarters from the stimulus rebate promotion.

Can you remind us -- you know, you had a 30% comp in the April quarter last year.

Can you remind us how much of that comp was driven by that promotion?

I think at the time, I think we said we had like 1,300 deals in the quarter that were related to that stimulus program; but we also said that we probably would have gotten most of those sales anyway.

It's hard to quantify the incremental effect of that program.

But there were about 1,300 deals that were directly associated with that stimulus program.

That actually went over April and May, too, so it's kind of --

Started around the first of April and went into May.

Right.

I remember that was a two-month deal, right?

Yes.

So that would have been 1,300 spread over both of those months?

Well, that was pretty much the April piece.

I don't recall exactly what May was, but -- and again, it's hard to say if most of those sales would have come through anyway without the promotion.

Got it.

Okay --

But we're in favor of another one.

Okay.

Thanks a lot.

Thank you, Bill.

Thank you, Bill.

Again, the question queue is empty.

Okay.

Well, I guess if that's it, certainly we want to thank everybody for listening in.

It was a good quarter for the Company, and we started off our fourth quarter well.

We're excited by what we're doing, and Hank mentioned some things that we'll talk about a lot more that are some real improvements in the way we're doing business and looking at our business; and we'll look forward to reporting to you all our year-end results and fourth quarter results in a few months.

Thank you very much.

This does conclude today's conference call.

You may now disconnect.