America's CAR-MART Inc (CRMT) 2010 Q2 法說會逐字稿

Good morning everyone. Thank you for holding, and welcome to the America's Car-Mart second quarter 2010 conference call. The topic of this call will be the earnings and operating results for the Company's fiscal second quarter ended October 31, 2009.

(Operator Instructions)

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 the access information are included in this morning's press release, which can be found on America's Car-Mart's website at www.carmart.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 up to date 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, 2009, and its current and quarterly reports 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 Chairman of the Board, Hank Henderson, the Company's Chief Executive Officer and President, and Jeff Williams, Chief Financial Officer. Now I'd like to turn the call over to the Company's Chairman of the Board, Skip Falgout. Please go ahead.

Thanks, operator. We announced earlier this morning strong operating results, and financial results for the second quarter and for the first six months of fiscal 2010. Significantly we reported a 61% increase in net income to $6.3 million, or $0.53 per share, up from a $3.9 million or $0.33 per share for the prior year quarter. Our topline increased 14.7% to $82.6 million on a strong retail unit sales increase of 14.5%, and solid same-store revenue increase of 11.4%. These outstanding revenues and sales gains reflect our commitment to increasing sales at existing dealerships, and adding new dealerships. It is also the result of our growing confidence, but not over confidence, in our ability to achieve these sales gains while not only maintaining, but actually continuing to improve our delinquency, collection and credit loss measurements.

This is evidenced by the statistics that Jeff will go into more detail in a minute, but are highlighted by this quarter's over thirty-day delinquencies at 3.4%, versus 3.8% last year, net charge-offs at 5.3%, versus 6.2% last year. And provision for credit losses as a percent of sales at 20.1% versus 22% last year, which is remarkably low by historical standards. All in all, we are continuing to advance the growth, operational and profitability initiatives that you have all been hearing about for the last couple of years. The team here at car mart is doing a great job, and as we further solidify and expand our position as the top automotive sales and finance Company in each of our markets. And we truly expect these kinds of levels of results to continues into the future. Now I am going to turn it over to Jeff to go into the financials. Jeff?

Thanks, Skip. As mentioned in the press release once again, topline revenues for the quarter increased by 14.7% compared to the second quarter of last year. The increase was a result of a 14.5% increase in unit volume, a 1.3% increase in the average retail sales price, a $749,000 increase in interest income, offset by a $30,000 decrease in wholesale sales. Same-store revenue increased by 11.4%, and our down payment percentage was 6.9%, for the quarter basically flat with last year's second quarter of 7%. Our initial loan term was approximately 26 months, which is flat with the second quarter of last year. Our weighted-average note term for the entire portfolio, including contract modifications was 27.6 months at October 31, 2009, again flat with this time last year.

Considering the slight increase in average retail sales price, the initial term is actually down slightly between years. Contract terms continue to trend favorably which is continuing -- contributing to our improved performance. Shorter loan terms help ensure that our customers maintain equity in their vehicles. The average retail sales price increased slightly to $9,024, from $8,913 for the second quarter of fiscal 2009. Sequentially the average retail sales price was actually down $17, or 2%, following a sequential decrease of $148 or 1.6% for the first quarter of this year. General wholesale pricing trends have shown some recent monthly decreases, but overall wholesale prices are above levels seen at this time last year. With that said, we continued to an outstanding job of minimizing purchase price increases.

Demands for the vehicles we sell remains high, and we will continue to leverage our purchasing strength as we move forward with our growth plans. Minimizing our purchase costs to keep the vehicles affordable for our customers is critical to our success, and operational improvements within purchasing are continuing to show benefits. The average retail units sold per month per lot of approximately 28 for the quarter was up almost 9% from the second quarter of 2009, and includes the effect of the five new lots we have opened since the ends of our second quarter of fiscal 2009. The five new lots average slightly less than 22 units sold per month for the quarter. Please note, that the monthly average lot volume is across our entire store base, and we do have some lots selling around 100 units per month. Leveraging opportunities within our current footprint will continue to be heavily emphasized as we move forward. At the same time, we will continue to add new lots, and a grass fire approach, as trained and qualified associates become ready.

Interest income was up 11.4% for the quarter. due to an increase in the average finance receivables outstanding of $27.6 million. The weighted-average interest rate for all finance receivables at October 31, 2009, was 12.4%, compared to 12.1% at October 31, 2008. The weighted-average interest rate for Arkansas loans were just over half of our outstanding loans were originated, was 8.4% at October 31, 2009, compared to 8.2% this time last year. The Arkansas rate was 6.7%, at April 30, 2009, and moved up to 7.2% at July 31, 2009, the end of our first quarter. The sequential increases in Arkansas rates between periods, resulted from the passage of the Federal level of the Supplemental Appropriations act of 2009 in June. We are now permitted to charge up to 17% for loans in Arkansas. We began charging 12% to Arkansas customers on June 26th, and we anticipate charging this rate on a go forward basis for new sales. As a reminder the Federal legislation does have a sunset provision, and the voters in Arkansas will be voting in the fall of 2010 on the state constitutional amendment which will effectively accomplish the same results. Should the voter not approve the state constitutional amendment, the Company will again be subject at a maximum rate in Arkansas of the discount rate plus 5%, effective January 1st, of 2011.

For the second quarter of this year our gross profit margin percentage was 43.8% of sales, up from 42.8% in the second quarter of last year, and down slightly from 44.1% sequentially. The improvement from the prior year period relates primarily to the effect of lower wholesale volumes. An improvement in the margins earned from our payment protection plan product, and lower operating expense,s namely gasoline. We will continue to focus efforts on holding down purchase costs, which has a direct effect on overall margins. And we expect to see gross margin percentages remain in the 43% range on a go forward basis. However, as previously discussed higher topline sales together with lower wholesale volumes, resulting from recent improvements in credit loss experience could continue to have a positive effect on gross profit percentages in future quarters.

The second quarter of this year, SG&A as a percent of sales decreased to 18.6%, from 19.1% in the same period last year. The overall dollar increase for SG&A related primarily to higher payroll costs, and to other incremental costs related to the five new lots open since October 31, 2008. As previously discussed at the corporate level, the higher payroll costs are concentrated in our HR, IT and collections areas. We expect to continue to leverage our infrastructure investments into the future for higher sales volumes. Additionally many compensation arrangements at the lot level are based on profitability. And as such payroll costs have increased in step with increased profits. On a sequential basis, total SG&A was basically flat with our first quarter. For the first quarter -- for the second quarter, net charge-offs as a percentage of average finance receivables was 5.3%, compared to 6.2% for the prior year's quarter.

Collections as a percentage of average financed receivables was basically flat at 16.2%, compared to 16.3% for the prior year quarter. At October 31, 2009, our 30 plus past-due accounts were at 3.4%, compared to 3.8% at October 31, 2008. The historical average at this time of year is closer to 4%. Our allowance for loan losses remains at 22% of finance receivables. And provision for credit losses was 21% of sales, compared to 22% for the second quarter of fiscal 2009, and 19.5% for the first quarter of this year. Several factors continue to have a positive effect on our credit loss results. Our branding campaign continues to give us a competitive edge, and further solidify us as the market leader in our service areas. We continue to invest our profits and improving our vehicle selection, quantity, quality and service levels. And when combined with our focus on affordability, it had a direct positive effect on collection results.

Ongoing credit constrictions are affecting sub-prime vehicle customers and our competitors, which is allowing to us gain market share in an expanding market. Being the clear market leader, gives us more collections leverage with the customer base in need of good, basic affordable transportation. While unemployment levels in our service areas have ticked up recently, the rates in the states where most of our revenues are generated are still significantly below national levels. Additionally, gasoline is still significantly less expensive when compared to the second quarter of last year. Also, on-going operational improvements within collections continue to show strong positive results. The charge-offs down, current AR up, and our 30 plus category lower than at this time last year, we are quite happy with our results thus far this year.

We saw strong overall cash flows again during the current quarter, reflected in finance receivables growing by over $9 million, $1.3 million in capital additions, and $5.3 million in income tax payments. All with only a $3.6 million increase in total debt. At October 31, 2009, we had $25.7 million in additional availability under our revolving credit facility. Our current debt to equity ratio was 19.96%, and our debt to finance receivables ratio was 13.5%, both very low and a testament to our increasing commitment to maxing -- maximizing our cash returns. Our extremely healthy and strong operating results have allowed to us really take advantage of our strengths at existing dealerships, and to benefit from attractive lease rates at outstanding locations for new lot additions. Now I'll turn it over to Hank.

Thanks, Jeff. Well, obviously we are pleased with results from the quarter. We again saw continued improvements in every area of our business. We sold 1,000 more vehicles this year and over last, for the quarter. And what's particularly satisfying about this achievement, is increases in sales at our newer stores. Our older mature stores have gained in units sales around 5% while the mid-range and newer stores had substantially higher gains on a percentage basis, which is exactly what we needed. What couple of year ago we made a change in what had previously been our advertising departments, to make it a true sales department, providing greater support through increased training both on-site, as well as more classroom, seminar style training than we previously had available. As well as providing more targeted advertising for those lots in need of extra help in that area. I'm very pleased with the efforts and progress of our sales department. Our Sales Director, Dustin Edwards, along with our Advertising Director, Barry Baggett, and rest of the sales team have really done a great job.

Certainly the increased sales levels have put greater demands on our purchasing team, and they have met those demands in excellent fashion. Not only have the lots been supplied with an adequate number of units in inventory, but moreover, the right inventory mix has been maintained at all of our locations, and helps assure we have no missed opportunities. Also with regard to our inventory as Jeff has already mentioned, the average price stayed relatively flat, keeping the terms affordable for our customers. In an effort to effectively maintain our needed inventory levels, and to plan for higher future levels, we continue to commensurately grow our purchasing team. We've recently added a third regional purchasing director to help provider greater support and oversight for our easternmost lots in Kentucky and Alabama, and over time as sales continue to increase, we'll be bringing on additional purchasing agents as well. This added support is particularly important, as many of our new openings throughout next few years will be in this region.

As we have said throughout the past couple of years we have tremendous growth opportunity within our existing stores. And we have achieved some very significant gains as more of the potential of younger stores has been realized throughout this past year. The normal expected progression of developing stores provides for significant growth opportunity. And we will continue to focus on providing each of our dealerships with the attention and support needed to maintain the growth. Clearly our results reflect that the additional support and focus has been very effective. And with that in mind in order to continue to deliver that level of support, while increasing the number of new store openings, we've continued to beef up our support staff in every area. Even throughout past few months we've brought on additional trainers and specialists in virtually every department, sales, collections, IT, training and staffing, many of these from within the Company having already proven themselves to be highly capable in their respective areas.

Our game plan is to have this support in place ahead of new openings, so that we are not scrambling for help later. I'm extremely pleased with the decisions we've made in this regard. And more importantly am more than pleased with the caliber of individuals we are putting into the support positions. They are truly impressive folks. Also important to assuring our future success is of course assuring the success of the present. And that may be stating the obvious, but we do know that creating a traditional are tradition of success not only company-wide, but at each individual dealership is the most powerful thing we can do. We rarely lose a GM who's experiencing success and growth of their store. Our reduction in turnover among the GM ranks means that our investment in our IT program, fuels the addition of new locations and is not tapped to fill vacancies at existing stores. As would be expected as some stores that were not performing as well as they could a year or so ago, are now posting better results. We've seen improvement in this area as well, and we do know that there's still room for improvement.

With regard to assuring the success of the present our focus of immediate is on our Zero Down Tax Deal promotion, which is going on right now. We've partnered with a tax preparation service TaxMax, to allow our customers to have their income tax returns prepared and filed at each Car-Mart location, and they also can pick up their check at our stores as well. Presently a customer can bring in the latest check stub which is used to estimate their expected return, and they can truly drive away for zero down. The regular payments begin immediately and a special payment or deferred down payment is set up to be paid, when they pick up their refund check.

This is our biggest single sales promotion of each year and we expect this year to be better than ever as this promotion continues to grow, as our systems improve. And more and more customers utilize this service and begin to come back each year to car mart to have their tax returns prepared and filed. Adequate inventory levels are also very important to the success of this promotion, and despite recent higher sales levels we are more than adequate many stocked at each location. We are also prepared with a number of units stock-piled to maintain the right level at each location. So far the initial response has been very positive. Sales are strong, and an added benefit to this program will be the strong cash flows in the third quarter and fourth quarter, as the tax refunds come in. And his present promotion makes for very exciting times here at Car-Mart. And I have to say that, coupled with that enthusiasm with the excitement generated by our plans for future growth, makes Car-Mart a great place to be. Well, that concludes our prepared remarks, so now we would like to move on to your questions. Operator?

At this time the participants will answer questions from the callers. I would like to reiterate from my earlier comments regarding forward-looking statements apply to both the participant's prepared remarks, and to anything that may come up during the question and answer session.

(Operator Instructions)

We'll go first to John Hecht with JMP Securities.

Good morning, guys, congratulations on a good quarter. Thanks for taking my questions. First question, is you mentioned about half the portfolio still in Arkansas, and you're repricing that upward with higher interest rates on new sales. What portion of that portfolio in effect, can reprice at this point?

The overall rate in Arkansas went from about 7.2% at the beginning of the quarter, to 8.4% at the end of the quarter. So we expect that rate to go to the full 12%, when everything gets rolled in.

And what is that, about another year and a half, two years to get there?

Yes. Most of -- that will be front loaded to an effect, but it will take another 18 to 24 months to get the entire portfolio up to 12%, but it's a little bit front loaded.

Okay. And wholesale down $300,000, I understand most of that was attributed to lower defaults, lower charge-offs, but is there any pressure on wholesale prices, when you unload the cars?

No, the pricing for the wholesale cars has held pretty consistent for the last several months. We haven't seen much of a movement either way, up or down. They've held pretty constant.

Okay. And the -- you mentioned you have healthy inventory levels coming into holiday season. But maybe can you give some color, what types of cars are popular at this time, any trends you are seeing in that realm?

I would tell you that nothing is really changed. We still have a strong demand for SUV's, pick ups, that sort of thing, so we continue to keep those in the mix. So, no, I wouldn't say we'll had any, any thing change in that regard.

Okay, and final question is, you mentioned you had 10% unit growth. Can you give us a sense on regions, I know you are going to grass-fire approach as well, but which states and regions you are focused on? And how well you are kind of staffed at the Car-Mart University to meet the demands of the human resource component?

Sure. We still have a few fill in locations at pretty much all the states we are in. But as far as where the bulk of our growth will be new store openings over the next couple of years, it will be more to the east. Just simply we are newer in Alabama and there's still several towns there, as well as Kentucky. As I mentioned that was one of our factors inside putting a purchasing director over there. Our MIT program continues to grow. We have a couple of trainers who are really specialists, who have a lot of experience that actually go to the stores, and work with new GMs when they arrive. And we are adding a couple of folks to that this year, and really think that's going to be one of the best things we can do to help with these new stores. We've opened I think, Jeff mentioned earlier there have been five openings over the course of the past year. We will open a few more between now and our year-end of April 30. And really going beyond that our sights, are set to get on track for a 10% unit growth.

Thank very much, guys.

Thanks, John.

I will take our next question from David Burtzlaff with Stephens Inc.

Good morning, guys, and congratulations on a great quarter.

Thank you, David.

Just a couple of questions. Jeff, how much do you think the tax promo, promotion that you started right before the end of the quarter, can you kind of quantify how many deals you may have made, in the second quarter?

No, we started that program a little early last year, too. So the net number of days in the third quarter for that program probably been --

Like four days.

It would be four days this year, maybe it was three days last year. I don't think that's going to have much of an effect on the quarter.

Okay. Okay.

If that answers your question.

And so far can you say how well that's doing compared to last year through, so far in November?

Of course we are, we do promote that program pretty heavily, and we have promoted it a little more this year than last. And so it -- out of the gate, it's going a little better than last year. And we expect it to -- to continue the momentum through the third quarter basically. So it is up some, and the percentages of our sales under this promotion are up some. But we have promoted it more heavily this year, too.

Okay

David, I would add to that, is we will see increased sales from this. But what the good news is our scoring system is obviously a lesser down payment would bring the score down, but all other things being equal the scores, are staying very consistent with what we'd expect. Good sales drivers, and also still good customers and good underwriting. So it's a good program.

Okay. Thank you very much.

Thanks, David.

(Operator Instructions)

We'll go next to Bill Armstrong with CL King & Associates.

Good morning, guys, I will also offer my congratulations. First, I guess clarification, Jeff, did you say wholesale sales were down $30,000 or $300,000.

Just $30,000.

30,000. Okay. Now it seems like that would not have been enough to account for the entire 100 basis point increase in your gross margin. Was there anything else going on that contributed to that?

Well, even though it's only down $30,000, the topline was up quite a bit. When you work through the math, that has a pretty good effect on the overall margins. So that was the primary reason for improved margins between quarters. Secondarily,we did have a little better performance on the PPP product, but most of that increase was the fact that the topline on retail basis went way up, and wholesale stayed basically flat. And working through the math, that has a pretty good effect.

Oh, okay. Now, charge-offs were down pretty significantly, even though collections were flatter or down slightly. And I guess I would expect collection are flat, the charge-offs to be roughly flat. How should I think about that? Is that, am I thinking about that wrong?

In the collections number that we talk about is the principal collected as a percentage of average AR during a quarter. So there's a lot of things that go into that percentage, higher interest rates, changes in the terms, in the actual place, point in time where the individual loans are. So more than anything, that flat collection number was expected. And we, by charging off fewer accounts during the quarter, we had a slightly lower expected principal amount on the collection side. So when you work through the math, and look at the individual loans, that was right where we expected it to be.

Okay. And then finally you mentioned that the branding campaign has helped with collections. How does branding and advertising help with that?

Well, we feel like as we gain market share against the competition, our customers have fewer choices, and we become the choice for the service we provide. And it does give us some leverage on the collection side, and the branding has certainly helped.

And higher traffic obviously gives us an opportunity to be a little more selective and raise our standards, so.

So the branding is also bringing in maybe a customer who may be a little bit of a better credit risk?

Yes.

Okay,thanks.

With no questions in the queue, I would like to turn the call back over to management for any additional or closing remarks.

That's surprising. I thought we had a few more questions coming in. If that's it, I'd like to say, thank you all for listening. It was a great quarter. We do anticipate those kind of results going forward. And we are working very hard as Hank mentioned, on our newer stores and the growth, and existing stores, and adding the right personnel to make all that happen. But it was a good quarter. And we look forward to succeeding going forward. Thank you very much.

That does conclude today's presentation. We thank you for your participation.