America's CAR-MART Inc (CRMT) 2013 Q1 法說會逐字稿

Good morning everyone. Thank you for holding and welcome to America's Car-Mart's first-quarter 2013 conference call. The topic of this call will be the earnings and operating results for the Company's fiscal first quarter 2013.

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 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 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 the forward-looking statement information, please see Item 1 of Part 1 of the Company's annual report on Form 10-K for the fiscal year ended April 30, 2012 and its current and quarterly results furnished to or filed with the Securities and 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 it over to over to the Company's Chief Executive Officer, Hank Henderson.

Good morning everyone. We appreciate you joining us today.

As most of you know, our focus has long been the success of our customers, and affordability is obviously critical to their success. We are very pleased that, for the second quarter in a row, we have brought down our average sales price. Had we continued on the trend we are seeing about this time a year ago, we would now be at an average sales price of a little over $10,000. We are happy to report that our average sales price for our most recent quarter was actually down to $9584. That's $200 lower than the prior quarter and $338 lower than the quarter before that. And Jeff will go into some detail as to how that specifically impacts us in the short-term.

You know, we've been in this business long enough to understand that our real value lies in our long-term focus and that is where ours remain. We've long been committed to keeping our vehicles affordable for our customers while maintaining quality, and we will continue to do so.

Our purchasing department has done an outstanding job increasing our number of sources that we can continue to increase the number of vehicles our agents have an opportunity to inspect, to ensure we maintain the level of quality our customers need while also being very focused on keeping our sales prices affordable.

I believe it's also noteworthy to point out that even as we brought down our average sales price for two quarters in a row, we still saw topline growth of 9.4% for the quarter with a 5.5% increase in same-store revenues.

I'm going to go ahead and turn it over to Jeff now to go into some detail about our recent results. Then I'll come back with a few more comments.

Thanks. Once again, our financial performance for the quarter was solid. For the quarter, as Hank mentioned, our topline growth was 9.4% to $110 million, with a 5.5% increase in same-store revenues. These increases are even more impressive when considering the average selling price decreases we've seen, a 2% sequential decrease following a 1.4% sequential decrease in the fourth quarter of 2012. Had our first-quarter ASP been flat with the fourth quarter, our topline would have been up about $2 million more and our revenue increase would've been over 11%.

In many industries, higher selling prices may be viewed as a positive but we know that decreasing price trends have many long-term positive implications for our business, which is great news for our customers and the affordability of our transactions.

Our down payment percentage was 7.2% for the quarter, basically flat with the prior quarter -- prior-year quarter. The weighted average down payment amount for all contracts at the end of July was at an all-time high of $660, which is up $31 or 4.9% from this time last year.

Collections as a percentage of average finance receivables was 14.9% compared to 15.9% for last year's first-quarter. For the quarter, our average initial contract term was 26.7 months compared to 26.4 months for the prior-year quarter. Our weighted average contract term for the entire portfolio, including modifications, was 28.1 months compared to 27.4 months at this time last year. The increases in term are primarily related our efforts to keep our payments affordable for our customers and to continue to work with them when they experience financial difficulties.

We have been very aggressive on keeping our relative term length shorter over the last several years and we will continue to focus on this. The lower selling prices will certainly help in this regard.

The quality of the vehicles we are selling is high, and we feel that the recent relatively small term increases have proved to be beneficial to our customers over the long-term. Overall inventory for vehicles we are looking for remains tight and we do expect this condition to continue with gross margins in the 42% to 43% range over the near term.

Our purchasing agents are working hard to find quality cars at good prices so we can pass on the savings to our customers. The sequential sales price decreases during the most recent two quarters is having a positive effect on our overall gross margin percentage.

The overall average retail units sold per month per lot for the quarter was up to 28.3 compared to 28.2 for the prior-year period. At quarter end, 27 or 23% our dealerships were from 0 to 5 years old, 28 or 24% were from 5 to 10 years old, the remaining 60 lots being 10 years old or older. Our ten-year plus lots produced 33 units sold per lot per month, which was relatively flat with the prior-year quarter for this category. We believe that we have significant room for future volume increases from our existing store base, including our dealerships over 10 years old.

The business model becomes even more attractive when factoring in future volume potential for new dealerships. We are proud of the productivity gains, especially in light of the extreme hot weather during the summer in what seems like increasingly unpredictability of consumer behavior to the retail level in general. We do believe we can continue to drive higher sales volumes at all of our dealerships by continuing to differentiate Car-Mart from the competition.

Interest income was up 14.7% for the quarter due to an average increase in average finance receivables outstanding of $35 million and an increase in the weighted average rate during the quarter to approximately 14.8% from 14.5% for the first quarter of last year. The weighted average interest rate for all finance receivables at the end of July was approximately 14.9% compared to 14.5% in July of last year.

For the first quarter, our gross profit margin was 42.8% of sales, which was down slightly from 42.9% for the first quarter of last year but up significantly from the fourth quarter's 41.7% as well as the prior year's third quarter at 42.2% and prior-year second quarter at 42.3%. The sequential increases in gross margin percentage are primarily due to the effect of lower average selling prices, slightly better margins on our payment protection plan and service contract products, and slightly lower cost of sales expenses as we really focus on controlling our car-related expenditures.

As we look forward, we are seeing good results from our efforts to reduce vehicle-related expenses after purchase, and we expect to continue -- this to continue. When combined with our recent selling price decreases, we are optimistic that we can keep the vehicles affordable for our customers and maintain our gross profit percentages to support our business.

As always, our goal is to balance affordability for our customers with appropriate gross margin percentages to enhance customer success.

For the quarter, SG&A as a percentage of sales increased to 18.2% compared to 17.9% for the prior-year quarter. The $1.7 million increase in overall SG&A dollars related primarily to higher payroll costs and other incremental costs related to new lot openings. We had an average of 115 dealerships operating during the current quarter, compared to 107 for the first quarter of last year. We continue to expect some leveraging for the full fiscal year and into the future as we increase volumes and serve more customers. And had the selling price been level with prior-year quarter, we would have seen some leveraging during this year's first quarter.

Once again, over the long-term, the sales price decreases are great for our customers and for the Company, but on a short-term basis, it does have a negative effect as to SG&A leveraging. The infrastructure investments we've made over the last several years will be leveraged as we grow.

For the current quarter, net charge-off as a percentage average finance receivables was 5.9%, up from 5.6% from prior-year quarter. The increase was partly due to expected higher losses at our newer stores as these lots have become a bigger percentage of our total. In slight increase in losses for some of our older stores, we are comping some very low loss numbers for the first quarter of 2012.

Principal collections as a percentage of average finance receivables for the quarter was 14.9%, down from 15.9% for the prior-year quarter. The decrease in principle collected percentage between periods can be primarily attributed to the increase in the average term of about three weeks and the average interest rate within the portfolio is higher this year compared to last. Additionally, we did modify a higher number of accounts this year and we're working hard with our customers in these difficult times. That is what Car-Mart does.

Also, we did end the quarter with a higher percentage of our accounts in the 0 through 30 day delinquent category due to the fact that our quarter ended on a Tuesday this year versus a Saturday for the previous period.

Also, in our efforts to keep current payments affordable, we have a number of special payments scheduled for tax time 2013 which we expect will increase principal collection percentages during our third and fourth quarters. We believe that the quality of the portfolio at July 31, 2012 is good, and anticipate credit losses for the full fiscal year to be within ranges we have historically seen. We will always try to do everything we can to help our customers succeed and we are generally pleased with the quarter from a credit standpoint. Our 30-plus past due accounts were at 4%, which is flat with this time last year. We will continue to push for improvements in lot level execution within the collections area and we will always strive to get better in this critical area.

At the end of the quarter, with our total debt of $85.2 million, we had $39.8 million in additional availability under our revolving credit facilities. Our current debt-to-equity ratio is 46.3% and our debt-to-finance ratio is 25.8%.

During the quarter, we repurchased over 215,000 shares of common stock for $9.4 million. Since February 1, 2010, we've repurchased approximately $80 million in our common stock, approximately 2.7 million shares or over 23% of our Company, added 21 dealerships and grown our receivable base by approximately $68 million.

Our Board of Directors has once again reauthorized the repurchase of up to 1 million shares under our existing repurchase plan, and we intend to repurchase shares in the future when conditions are favorable.

Now, I'll turn it back over to Hank.

Thanks Jeff. As I mentioned earlier, we remain focused on the long-term. For the past several years, we've done a lot of work building the right infrastructure we need to carry us into the future. And many of our discussions around here involve asking the question of how a particular change in a procedure or an investment in infrastructure serves us as we double in size. As our intent is to stay well prepared ahead of our growth, I am very pleased to report that we are continuing to make big strides with regard to the training and development of our associates. We will soon be rolling out much more online training to provide more self-study for our associates than we've ever had before. And this will not at all replace or reduce our face-to-face training but will supplement it and allow our associates to go back for refreshes as needed and will also serve as a means to introduce new procedures and processes as they are updated. We are very mindful that, to provide excellent service, we must have excellent training and these tools will be extremely beneficial and it is certainly one of the biggest developments ever in this area for us.

We also have some very big initiatives underway within our IT department that will allow us to be much more nimble with our operational software as we grow, so that we will be able to update and improve our systems more quickly in the future as needs present themselves. And you can expect to hear us talk more about this as these developments come into play through the upcoming year.

Very often, when people are trying to understand our business, we are asked, what am I missing? I suppose different people can miss different little subtleties about our Company, but the one thing that you can't miss and truly understand what we are really all about is our relationship with our customer. It is the vital difference that sets us apart and enables us to enjoy the loyalty of our customers and earn their repeat business. It's how we are able to continue to grow sales through the referrals of our existing customers, and how we are able to continue to manage our credit losses. Now, that relationship is the link that we need to work with our customers through the day-to-day challenges they experience. How well we are doing in this area is the critical factor which will most impact our sales and collections. That is why preserving the culture of our Company and the training initiatives I mentioned earlier are so vitally important.

As we move into the future, we must remain focused daily on holding ourselves accountable with regard to our customer relations, as it is the heart of our business. One reason I say this now is we are more and more asked how all the various things going on in the world impact our business. Gas prices, unemployment rates, interest rates, the upcoming election and so on. We obviously can't predict all that or even quantify the specific impacts. We have been in this business for over 30 years, and these ups and downs and uncertainties have always been with us and I expect they always will be.

What we do know for certain is that our customers will always need vehicles to get to and from work and to the grocery store and so on. And it is our responsibility to provide them with the most affordable vehicles possible to meet their budget, and to earn the respect and develop the rapport necessary to work with them through difficult times as they arise. We are very confident that, so long we remain focused on this path, that the growth of our Company and the opportunities we can provide are extraordinary.

So that concludes our prepared remarks and we would like to move on to any questions you have, so operator?

(Operator Instructions). John Hecht, Stephens.

Good morning guys. Thanks for taking my questions. The first one is, Jeff, you cited I think 33 cars per month per lot at 10-plus years. Do you have a figure, or can you give us some kind of details around with the younger lots do on average?

The lots from 0 to 5 years of age are in the low to mid 20s. And then the lots that are from 5 to 10 years old are going to be in that mid-20 range.

Okay, thanks. Then moving on to gross margins, you guys cited some operational efficiencies which had been protecting and enhancing margins more recently. What about -- what can you tell us about the cost of the car, and have there been any characteristic changes to the types of cars you're buying in terms of the mix of product or the age or the mileage or anything?

I wouldn't say that the mix hasn't really changed. Our goal with the mix has always been at all of our lots to have -- whether it's SUVs, trucks, vans, so forth, to have a good mix so we don't miss sales when customers come.

I think prices in general have flattened out a bit, but we have made efforts to hold down, bring down our average price, so we have seen a little bit of an uptick on mileage. That doesn't necessarily mean we've compromised any quality there because, as I mentioned, we've put forth some efforts to avail ourselves to a lot more cars to look at. So I think our quality remains good, but yes, pushing down the price means we have a little bit higher average mileage out there.

Okay. And final question related more to the credit side. You had a modest rise in charge-offs. While your 30-plus day statistics have been relatively stable, what can you tell us about the roll rates from, say, 30 to 90 to 90-plus? And what's that telling you about the customer behavior, the types of stresses your customers are going through?

We don't have many accounts at all and any dollars at all in the 60 or 90 day categories. We don't have a big backlog of accounts out there that are in need of charge-offs at any one point. But --

I think it's fair to say that part hasn't changed because it's remained low.

So the roll rates moving from early-stage delinquencies to later stage delinquencies, you haven't seen any major fluctuations in that?

We have -- our customers are living paycheck to paycheck, as they always have, and we are seeing some maybe a little higher delinquencies in those 0 to 28 day categories just as they struggle to make the payments. But that's not anything different than we have seen through the years, so not any big changes there.

We do see collections during the first of the month higher than toward the end of the month, just as customers try to manage their money. That's been going on for a few years now.

Great guys. Thanks very much for the details.

John Rowan, Sidoti & Co.

Good morning guys. Just a couple of questions here. First, Hank, you did say that the average mileage has picked up a little bit. But you also mentioned in the prepared remarks about controlling what you're spending on cars, especially with some of the insurance products against warranty issues. How do you see that going forward? Obviously, with the increase in the cars, are they just better where you have to put but less money into them, or do you think there's some type of uptick in what you're going to have to spend on -- to maintain these cars?

I think a lot of it has to do -- I tie this into some of the training that we talked about. Keep in mind that we have opened a number of new stores in the past couple of years, and certainly managing expenses requires a lot of expertise and training in some of the new tools which is all connected because some of the new IT tools we put in place give us a lot more visibility on the spending, enable us to better compare rates we are paying in some areas with others, so we do feel like we have -- we can still gain some efficiencies on just average amounts we are paying for repairs. And again, I felt like we can have a little bit of an uptick on mileage without really having to expect to see more repairs across the board. It's a slight uptick; it's not dramatic. So I actually feel like -- and it's a big focus of everyone here this year. I think we can actually still gain some ground at the same time with regard to our repair expenses.

Fair enough. Then the second question, in general, outside of just Buy-Here Pay-Here space, there's lots of privately held companies that provide credit through other used car dealerships. When you look at that group, have you seen any increase in competition of late, or has it actually pulled back?

No, I'm sure it's out there. We are certainly aware more dollars are going into that. But as far as to say that we've actually felt it or measure it, I wouldn't say so because our sales are continuing to go up. But certainly I'm sure it's out there. We don't have a lot of customers that are going to move to the next level of our market. Our market is plenty big enough to keep us busy.

I think back when the economy took a hit, we expected a big trade down into our market and really never saw it. So now that the financing has come back in above us, we are not seeing it as a negative affect the other way either.

Fair enough. Thank you.

Martin Kemnec, Jefferies.

Thank you. Good morning guys. Jeff, just one question for you. I know you guys targeted a 20% to 22% provision kind of on an annual basis. Can you -- with the upward trend in mileage and vehicle age, I'm just kind of wondering. Does that influence your recoverability estimates, and then does that in turn change the way that you think about your forward outlook for provisions?

No. The mileage increases we're talking about are pretty minor. And if we do have to take a car back, the mileage differences we're talking about are going to have no real effect on the wholesale value of that car to speak of. So it's a minor factor, but not -- it's just not very important in the overall analysis.

Okay. And then, on the increase this quarter, is that just more a function of the growth in the book, or how should we think about that?

Yes, as we add new lots, which we have certainly been aggressive the last few years, we expect those newer lots to have higher credit losses for a period of time. And so the percentage of lots that are younger and experiencing those little higher loss rates, the percentage is higher. And that's just part of our price to develop those lots and get them down lower over time, but they do start out a little higher. And that is expected.

(Operator Instructions). Bill Armstrong, CL King and Associates.

Good morning Hank and Jeff. So, you had a $200 reduction in your average selling price, and it sounds like at least part of that is from the higher average miles. Are you seeing any relief in terms of overall pricing in your acquisition costs?

I think, yes, we are. We don't exactly track like a Manheim Index, but I think, overall, there has been a little bit of listening in the market for used cars. And that's a good thing. We're certainly taking advantage of that, but I think we are doing a better job internally in addition to just the general market decreases.

In terms of the higher mileage, what sort of risk do you see maybe down the road of a higher number of these cars breaking down before the loan is paid off?

You know, if we had made a -- if we had seen a big move in that, I think that would be a concern. But I don't think we've seen enough of a change there to really expect to see any measurable difference as a result of the additional mileage. It's been pretty slight.

Okay. Moving on to just -- from a question asked earlier, there is more accessible auto financing available to subprime lenders -- subprime consumers across the board. Are you seeing maybe more competition from other buy-here pay-here dealers because they have more -- they are able to provide more financing, or not necessarily?

Not necessarily. I would say our competition remains about the same across the board, primarily where competition is still the mom and pops, and we haven't seen a lot of change there.

Yes. Okay, and then finally just a question for Jeff on the collection rate. Could you just go over those factors that you cited before on why the collection rate was down year-over-year about 100 basis points, and I think you've indicated that you expect it to improve going forward a little bit.

Yes. To maintain affordability, and we have really looked at payment amounts and terms a little bit, we have been so aggressive for the last four or five years that we realize, to maintain affordability, we had to give a little bit on term. When you're talking about going from 27 months to 28 months on average, that has a pretty big effect on the percentage principal collected during a quarter. And that was the biggest factor in that decrease from 15.9% to 14.9%.

In addition to that, the modification activity we had where we are working with customers and pushing payments out just a little bit certainly had an effect, and then the fact that the quarter ended on a Tuesday versus Saturday last year had a pretty good effect on that number. And as we mentioned, we are also actively scheduling payments out in next year's tax time. So, all those factors contribute to a little lower collections currently, but increasing affordability and keeping our customers in those cars is what we're primarily focused on.

I think our guys in the field are making good decisions when they're having to refi an account, and I think we are taking pretty good advantage of our customers' expected tax refunds in the next tax time. So, we do expect a good third and fourth quarter from a principal collected standpoint, but some of these factors kind of hurt us in the short-term.

Right. You did mention more loan modifications, which would indicate that at least some customers are having a tougher time making their payments. What kind of concerns does that bring to you?

Actually, in some regards, it's a good thing. It means that we are -- this is how we operate. And it means that we are successfully working with customers and keeping them in their vehicles even though they are having some tougher times. So I feel like it's pretty much business as usual for us.

Good in terms of there not so far gone that you have to repossess the vehicle and you're able to work through better term, in other words?

Absolutely, absolutely.

Okay. I got it. Thanks guys.

Martin Kemnec. Jefferies.

Thank you. I just had one follow-up on the loan modifications. Can you quantify that and how that relates to your previous experience? Was it up materially or is it just kind of something you wanted to highlight this quarter? Thank you.

Yes, it was up. It was up about 10% over what we've seen historically. So there was an increase in modifications. But as Hank just mentioned, that means our folks out in the lots are really working with these customers keeping them in their vehicles. And we feel like our managers do a very good job when they modify an account, of getting things set up for success. So we feel good about the long-term decisions there, but the modification rate is up about 10% from last year.

Okay, thank you.

(Operator Instructions). I show no further questions at this time and would like to turn the conference back to Mr. Hank Henderson for closing remarks.

I'd like to again thank everyone for being with us this morning. And I think I'd just like to reiterate that what we saw with past quarter with our sales prices coming down, this isn't just something that occurred with what's happening in the world but moreover I think our response to it. We're focused on long-term and our customers becoming repeat customers. In order to do that, we need for them to be successful. And we know that keeping vehicles out there on our lots is a better fit. Their budget is critical, so for us around here, it is good news and that we are doing the right things to take good care of our customers. And so we feel like, so long as we do that, that our long-term future is very, very bright. And so our attitude is certainly very positive about the future of our Company.

So we do look forward to talking to you more throughout the year, and continue to bring good news. Thank you everyone.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all disconnect at this time.