America's CAR-MART Inc (CRMT) 2011 Q2 法說會逐字稿

Good morning, everyone. Thank you for holding, and welcome to the America's Car-Mart second quarter 2011 conference call. The topic of this call will be the earnings and operating results for the Company's 2011 fiscal second quarter. 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 in the 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 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 One of Part One of the Company's annual report on Form 10-K for the fiscal year ended April 30, 2010, and its current and quarterly reports furnished to or filed with the Securities Exchange Commission on Forms 8-K and 10-Q. Participating on the call this morning are Hank Henderson, the Company's Chief Executive Officer and President, and Jeff Williams, Chief Financial Officer. I would now like to turn the call over to the Company's Chief Executive Officer, Hank Henderson.

Good morning, everyone. We appreciate you joining us today. As you've all seen from the press release, we are continuing to grow with increases in both sales and earnings per share. But we did fall short of the type of results we know we're capable of delivering, and particularly with regard to credit losses. We had an increase for the same time period over last year, and that is somewhat of a disappointment for us. Credit losses were particularly low this time last year. We're still within our range. But in review, we feel like we could have done a better job and not seen quite the increase that we did.

Our percentage collective was actually up over last year, so we did have very strong cash flows for the quarter which Jeff will go into in more detail. And our refinances were actually lower. Generally, we would view this as a very positive thing, but with the rise in repossessions, we feel like that is an indication we had room to work with our customers better than we did. And that is where our immediate focus lies. Working with our customers through difficult times has always been a part of who we are, and the key reason we've gotten where we have. So while we have made improvements in many of our collections, it appears we did slip a bit on our problem solving. So we know what it is we need to do, and we are confident we'll see these coming down.

Sales do continue to grow year-over-year, and we have very recently made significant improvements with regard to the quality of our deals. And I'm not referring to selling different people or necessarily higher credit scores, but specifically as to how we're structuring our deals. We have fully rolled out our new deal riding system which provides for incorporating more special and seasonal payments into our customer's payment schedule to help them get into either equity situation more quickly. This new system actually helps prompt our sales staff with suggested special payments, intervals, and amounts to make the whole process go much more smoothly for our customer and to ensure we're not skipping any of the steps that we know to be essential in putting together the best possible deal. Our goal was to have this new system fully in place, any bugs worked through, and everyone trained on it prior to our zero down tax promotion. And I am very pleased to report that this was accomplished. On behalf of everyone in the Company, I want to express our appreciation to the IT staff for all the extra effort and hours they've put in to make this happen. It's a very impressive system -- working smoothly, and I actually believe that the end product turned out to be even better than we envisioned when we first put this idea together. I also thank all our associates that helped with all the testing. Their hard work, time, and patience is duly noted and greatly appreciated.

This was truly an ambitious undertaking, and to see it finally in place and operating smoothly is very satisfying to all who were involved. We're already realizing benefits, as it does help to expedite the sales process, and we expect to begin to realize some significant cash flow benefits over the course of the next few months. I would like to reiterate that the purpose for making these enhancements is all centered around an effort to structure deals in a fashion that helps assure our customers the very best possible opportunity for success. As you've heard us say many times before, repeat business is the key, and we want to make sure we're doing everything we can do to best assure our customers' success. And that they will keep coming back year after year.

As I just mentioned, our zero down tax return promotion is underway. This is our biggest sales promotion of the year. We are off to a great start. We had great success last year, and our intent is to continue to improve and build on that. For those of you who are already familiar with this promotion, you know that we are partnering with TaxMax to provides the tax prep service to our customers. They worked tirelessly providing training to everyone involved, making every effort to see to it that this is going to be a great success.

Also pleased to report, we did enter this promotion very well stocked on inventory. This is a big sales time for us, so it's critical that we have the adequate lead on inventory so that we don't have any days where any of our stores don't have what our customer needs. We understand that in order for us to hit our sales targets, we can't afford to miss sales opportunities by not having the right vehicle for our customer. In addition to having the right mix, we ideally need to keep the right to cross range so that we have what we need to offer the customer, something affordable. We're up about 2% year to year, but we were actually able to bring that down just a bit from the fourth quarter. And our intention is to hold this as close to flat as we can without sacrificing quality. As we discussed on a previous call, we're in the process of developing more sources in larger markets which should prove to be very helpful in our efforts to keep our sales price down. So with that, Jeff is going to go into some more specifics here.

Thank you, Hank. Obviously, we know we can do much better on the credit loss line, but we are pleased with our steady overall top line growth and the pace and success of our new lot openings. Over the last ten plus fiscal years, we've grown the top line at a compound annual rate of just under 15%, and that general level of growth is what we're pushing as we move forward although it will most likely not happen in a straight line. Our 11.2% top line revenue increase for the quarter was the result of a 5.9% increase in unit volume, a 2.1% increase in average retail sales price, a 26% increase in interest income, and a $1.6 million increase in wholesale sales. Same store revenue increased by 8.1%. Our downpayment percentage for the quarter was 6.8% this year, compared to 6.9% for the second quarter of 2010.

For the quarter, our initial average loan term was 25.4 months, down from 26 months last year. Our weighted average loan term for the entire portfolio, including contract modifications, was 27.4 months compared to 27.6 months at this time last year. The decrease in our terms relates to the software and operational changes that Hank mentioned just a minute ago. These changes are allowing us to shorten terms, even in the face of increased pricing, by assisting our customers and maximizing the upfront equity and scheduling payments to coincide with the anticipated income tax refunds. With the increase in overall average retail sales price, as well as the increased interest rates for Arkansas loans, we are even more pleased with the trend in overall term length within the portfolio. We are optimistic that we will continue to see the average terms come down some as we move forward with this initiative. Our goal is to earn the repeat business of our customers, and the best way to do that is to ensure that they're successful. And these changes will certainly help.

The average retail sales price increased to $9,209 from $9,024, or 2.1% for the second quarter. Sequentially, the average sales price decreased slightly, 0.4% or $33. A trend that is consistent with prior years' second quarters. Vehicle supply remains tight, and we'll continue to leverage our purchasing strengths. We do anticipate overall gross margins in the 43% range as we move forward, even with some increases in selling prices. Minimizing increases in purchase costs helps keep vehicles affordable for our customer which is our primary goal.

The overall average retail units sold per month per lot for the quarter increased to 28.4 from 27.7 for the prior year quarter. The monthly average for the 11 new dealerships opened in fiscal 2009 and forward was right at 23. And for those lots opened prior to fiscal 2009, the average was approximately 29, which is basically flat from the prior year. We believe that all of our dealerships have significant room for top line growth, but as we have indicated, we expect that a large percentage of our future top line growth and increased profitability is going to come from the 51 stores that are less than ten years old. 27 of which are less than five years old, as well as from new store openings. Sales volume leveraging opportunities within the current store base will continue to be heavily emphasized, and at the same time, we will add new stores.

Interest income for the quarter was up 26% due to an increase in average finance receivables outstanding of $24.8 million, and an increase in the weighted average interest rate during the quarter to 13.9% from 12.2% last year. The weighted average interest rate for all finance receivables at the end of October was right at 14% compared to 12.4% at this time last year. The weighted average interest rate for Arkansas loans was 11.2% at the end of the second quarter and has moved up from a low of 6.7% at April 30, 2009, due to the passage at the federal level of the Supplemental Appropriations Act in June of 2009. We are pleased that on November 2, voters in Arkansas did approve a Constitutional amendment allowing for up to 17% for non-bank loans and contracts in the state.

For the second quarter of this year, our gross profit margin percentage was 42.8% of sales. This is down from 43.8% for the second quarter of last year and 43.8% sequentially. The reduction relates primarily to higher wholesale sales, which resulted from increased credit losses during the quarter, the increased average selling price, slightly lower margins on service contract sales offset by slightly improved margins on our payment protection plan product. We will continue to focus our efforts on holding down purchase costs, which had a direct effect on overall margins, as our selling prices are based on the cost of the vehicle.

In the second quarter, SG&A as a percentage of sales decreased to 17.8% from 18.6% in the prior year period. The $720,000 increase in overall SG&A dollars related primarily to higher payroll costs and to other incremental costs related to new lot openings. Included in the overall dollar increase was noncash, stock-based compensation, which was up approximately $260,000 for this year's second quarter, when compared to the second quarter of last year. As previously discussed, the increase from the prior year primarily relates to the increased payroll costs in our HR, IT, and collections areas. While we do expect to see some benefits from SG&A leveraging as we move forward, with our significant growth plans, we want to ensure that we don't under-invest in infrastructure to support our growing business especially in the collections area.

For the current quarter, net chargeoffs as a percentage of average receivables was 6.5%, up from 5.3% for the prior year period, and 5.1% sequentially, Principle collections as a percentage of average financial receivables was 16.2%. We did collect $1.8 million more in interest during the current quarter and when you combine interest and principal collected, the current quarter was a very strong 19.5%, compared to 19.1% for the prior year quarter. So collections were strong for the quarter.

Our 30 plus past due accounts were 3.9%, compared to 3.4% at this time last year. The allowance for loan losses remains unchanged at 22% of finance receivables at October 31, 2010. The provision for credit losses, as mentioned, was 22.7% of sales for the current quarter, up from 20.1% for the prior year period. And up from 19.5% sequentially. Credit losses were higher than we've seen recently. But as we have previously discussed, losses in the 20% to 22% range are what we expect with the growth rates we are seeing, but the 22.7% was certainly above this range. The overall quality of our deals has not changed significantly, and our credit metrics remain strong. We will continue to push for improvements in lot level execution within the collections area. We do expect to see continuing improvement in collections during the upcoming tax season, and our lots are already preparing for this very important time of year.

We saw strong overall cash flows again this quarter, reflected in the increase in unit sales and resulting revenue growth of 11.2%, finance receivables growth of $4.5 million. $1.1 million in net capital expenditures, $3.8 million in common stock repurchases, $7.4 million in income tax payments -- all with only a $6.9 million increase in total debt. At October 31, 2010, after taking into effect our newly completed $90 million financing package, we had $38.8 million of additional availability under our revolving credit facilities. The new facilities have a three-year term with pricing at LIBOR plus 2.75 or prime less 0.25 with no floor. Our current debt to equity ratio is 28.3%, and our debt to finance receivables ratio is 18.5%. As a reminder since February 1, of this year, we have repurchased almost $22 million in common stock, or 918,000 shares, or 8% of the Company and grown our receivables base by $16 million.

Our financial position is extremely healthy. We plan to continue buying back shares without sacrificing any growth opportunities. We believe in the long-term value of our Company. We did incur a $0.03 per share charge in November for the early payoff of these inexisting term loan as part of our new debt arrangement. This charge will be reflected in our third quarter results. Now, I'll turn it back over to Hank.

Thanks, Jeff. Before we go to questions, I would like to tell you where we are on our new store openings. We have opened four so far since May 1. We have new stores in Clarksville, Tennessee, Farmington, Missouri, Opelika, Alabama, and Springdale, Arkansas. So that puts us now up to 101, and we do have four more new locations already in the works to keep us on pace for the number we've targeted for the year, and more details will be forthcoming. But I can tell you that these are spread through Oklahoma, Kentucky, Tennessee, and Alabama. And this is ideal for us as it enables us to spread out our resources so that not one specific area becomes overtaxed. To assure that these new locations receive all the energy and focus they need to get off to the best possible start. We're very pleased with the initial starts of our recent openings and are very excited about the prospects of those in the works. So that concludes our prepared remarks. So we would like to move on now to your questions. Operator?

Thank you. (Operator Instructions) Our first question comes from John Hecht from JMP Securities.

Good morning, guys. Thanks for taking my questions. My first question is about the credit slippage in the quarter. Can you guys point to any changes in your customer base? Or changes in your geographical economics? And maybe give us some details about where you guys have identified the weakness as coming from?

Yes, I think it relates more to just what we've been training to. I think that it had -- it did go up a bit. And over the past couple of years we have developed some good systems and processes, and we've been training to that. But a very critical part of our collections is also the problem solving, the hands-on working with the customers. And I think as in our quest to -- with our collections module and processes and all that, we probably need to spend a little more time on actually solving problems as I mentioned. We do track our refinances. Those were actually very, very low, and in the time where losses are on the rise, you would actually expect to see those come up a bit. But they didn't. So that's an indication to us that we need to roll our sleeves up and do a better job. Being a little more creative one-on-one with our customers. I think that's very achievable for us. So I have a lot of confidence we'll be able to I correct that.

But are you -- is there any specific type of customer? Was it an unemployment issue? Is it a geographical issue, or is it just broad spread--?

I really wouldn't point to any macro factors. Just ourselves.

Okay. And then the slight slippage in gross margin, you guys suggested a lot of that was increased wholesale activity. If you exclude that, were your margins generally flat? Or was there any changes in that regard?

Most of the decrease was the wholesale effect, John. And we did see a slight reduction from a little higher expenses in that the sales price being a little higher versus last year that did affect margins just a little bit. We are looking at our best estimates around that 43% mark as we go forward, even with a little bit of price increases.

Okay. And then the final question is related to your activity thus far in the quarter. When did you guys initiate the tax return program this year? And have you seen the type of response to that that you would expect to see given the seasonal influence?

Yes. Originally, it was scheduled to launch the 1st of November. We did move that up a few days. So we picked up some that last week of October. And yes, it is off -- we're very pleased with the start we are off to. It's going well.

Thank you very much.

Thank you.

Thank you, John.

Our next question comes from Bill Armstrong with CL King and Associates.

Good morning, Hank and Jeff. I was wondering if you could maybe give us a little more detail on how your collections fell short of expectations? What happened organizationally? And what specific steps can you do to improve collections going forward?

Well, as best I can, I think I have already spoken to that. I think that it really lies within where we're putting our emphasis with regard to our training. We've looked at it and asked that very question of ourselves. And we feel like we really need to do more training, working with our folks on how to work with our customers better. And that's why I go back to we actually saw refinances down, even though losses were going up. And we feel like that gives us opportunity to improve there. We feel like we can. So that -- and that's where we are.

Did you intentionally reduce the ability of customers to refinance and as a result charge off more loans?

I wouldn't say that we specifically reduced that. Over time, we have put a lot of focus on to making sure that that is within an acceptable range for us. Actually, we've been below what we set for ourselves on some internal standards, so we've been doing well on that. And I think that our business, on all sides, sometimes it's a balancing act. You don't -- we understand we need to work with our customers, and there are times we go too far. Sometimes we tighten up too much. I think that right now part of it is education of our folks. That we do need to do better working out alternative arrangements, and we have some room to do that.

Yes. You've been -- over the last three years or so, you've really done a good job with working with the customers more and improving your collections and underwriting standards, et cetera. And it has showed up in the numbers. So I guess I'm still trying to wrestle with what went wrong? Or what went maybe a little bit off in this past quarter.

Well, I think that over time as long as we've been in business, there is an art to the business of knowing when you're tightening up too much and how that affects you and when you're running a little bit too loose. I think that if we do run too tight, we can create or force some losses. And so I do think there's time for us to say, hey, we've got to do a better job working with folks. And truly, I think that's where we are. And I think it is something that we certainly have the expertise and talented folks here to fix that. I feel very confident we will.

Okay. Question for Jeff. You mentioned 43% gross margin going forward. In the past, you've talked about a 43% to 44% range. So is this dialing down your gross margin expectation a little bit?

Yes. I think with the tight supply of inventory out there, we've done a really nice job of keeping ASP increases to a minimum. And we do expect to keep focused on that. But realistically for the next few years, the supply of cars is going to remain pretty tight for us. And with an increasing sales price, that has made us look back at that 43% to 44% and say, really the expectation is going to be closer to 43%.

Got it. Okay. Thanks.

Thank you.

Our next question comes from Mike [Ogborn] with Maple Tree Capital.

Hello. Thanks for taking my question. What -- when you say working with your customers in order to rectify some of these credit issues. What specifically in terms of actions does that mean for you guys? And secondly, you have opened four stores, you have four more pretty soon. As you look out over the next several years, how many new locations within your current area will your current service area support? Thank you.

Okay. Well, when we talk about working with our customers, that's truly the heart of what we do. And that's very much ground level training, and truly with -- it boils down to the very individual customer circumstances. It may be the different ways we can help a customer when they lose a job, or when they go through some personal issues. Or when they have trouble with their car. And for us, it's to make sure that each of our folks that work with our customer are well equipped and know all the various ideas, responses that they can do to help our customer through that. And certainly, just the level of intensity and effort that goes into that. And we feel like we can do a better job. We have equipped our folks pretty well learning how to use all the various systems and modules. All this great stuff we have in place. But we think we're laying it out there. We think we can do a better job teaching our folks how to be more creative in the problem-solving, and that we need to put more effort into that. As for the new locations, I believe we've got on our presentation that is on our website -- you can see a map that identifies -- I think, there's what? 165 total locations that fall within our existing footprint. Those do fall over into a couple of other new states, but really without going outside of where we are, we feel like that that's about how many years we've identified in that range. And that's what puts us looking out over about the next five years, roughly.

That would be 60 additional locations.

Yes.

Okay, and one follow-up. As you look at the current economic environment, pretty high unemployment, pretty high prices for used cars. And then within the last twelve [months], you have started to grow a little bit more on the number of stores. And then we see the credit varying a little bit. In terms of trying to grow in this environment, is it too much to ask for the Company -- is it distressing the Company in terms of their personnel to do that? Or is this truly a discrete event within that -- within one quarter. How do you se that? Because one of the things -- yes, go ahead. Sorry.

I could just say we don't feel like we've got any correlation between recent openings and the recent spike in credit losses. We have -- we feel very confident that we have built up a structure to accommodate the effective oversight of more stores. Certainly as you get -- we've long said, the newer stores will tend to carry a little bit higher credit loss themselves just because we haven't yet seasoned those accounts and rolled back in the repeat business. So over time, as you get a higher mix of new stores in there, you can push that up a little bit. But with regard to our ability to oversee this number of stores, we feel very confident in that and truly don't feel like this recent spike has anything to do with our new stores.

And one quick follow-up, and I'll get back in queue. You came to the end of the quarter you saw this bump in credit cost. Did you jump on that right away? And have you begun to see positive results from jumping on that at the end of the last quarter?

That's an excellent question. Yes, we have. Because things do move pretty quickly around here. We have customers that -- keep in mind, our most common pay cycle is biweekly. And actually, we have some customers that do pay us weekly. So things happen and move very fast. And yes, we have seen positive results.

Thank you very much.

(Operator Instructions) And next on the line, we have Brian Roman with Rebecca.

On this credit issue, a couple of questions. If you're building a model, and you're at 20 -- you view as your normal range of 20% to 22% as a credit provision level. And now it's 22.7% -- I think is the annualized number. Should one use a higher number going forward, like say a 22.7%? Or can you start to -- based on the previous question, can you start to throttle that back a little bit because you're showing progress?

Well, the 22.7% is just this quarter. I wouldn't consider that an annualized rate at all. We were at 21.1% for the first six months. And looking back over several quarters, the running 12-month loss rate is quite a bit below 22.7%. So when we say 20% to 22%, that would be more like an annual rate for the full fiscal year.

Of course, yes.

We're still comfortable talking about 20% to 22% with the kind of top line growth we're looking at.

For the year.

Yes.

And to get back to the previous question, you think you're able to quickly -- excuse me -- turn around this process and nip this in the bud?

Yes.

Okay. And you talked about it earlier, there's this trade off between car price, credit availability, and sales. And you say -- I think you said it was art more than science. Do you think that if you have to be a little more creative on collections that it will impact the top line? Negatively, that is?

You mean with regard to as we work with the customer. No, that's always been a part of what we do.

You're saying that -- if you have come -- let's assume you've integrated a program through training with your lot managers and assistant managers to be -- to work with customers on collections that it's not going to affect the top line particularly going forward?

No actually, over the long-term, it will help it as we do a better job with our repeat business.

Okay. What are the plans for share repurchase? I know you've repurchased I think about 6% year-to-date.

Yes, we still have 900,000 shares available under our most recent share repurchase program. We will buy when the opportunity presents itself to us. And we plan to continue to do that.

I assume today you can't be repurchasing stock because there is a blackout around earnings?

We can't comment on that.

Thank you.

Thank you.

Our next question comes from the line of Anthony Soslow with Global Capital Management.

Thanks for the call. I know earlier in the month Arkansas approved that state Constitutional amendment allowing for 17% interest on non-bank loans. How will that impact interest rate charge do you think, next year? How will that impact earnings?

Yes, the 12% we've been charging Arkansas customers has been in effect since June the 26th, of last year. And we've gone from 6.7% to 11.2% to Arkansas customers. So we don't have much more to go in Arkansas to get that fully baked in 12%. So there's not going to be a significant increase in interest income going forward from that constitutional amendment.

(Operator Instructions) I'm showing no further questions in the queue, sir.

All right. Well, thank you very much. And obviously, we're getting a lot of questions about our credit losses. I'd like to reiterate that we are disappointed that we saw those go up, but at the same time, feel very confident in our ability to get those back down. And we're certainly not in a panic mode around here, but it certainly serves as an indication to us of what we need to do. I think we are responding appropriately, and so we look forward to good things. Thank you, everyone, for joining us this morning, and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.