America's CAR-MART Inc (CRMT) 2014 Q3 法說會逐字稿

Good morning everyone. Thank you for holding and welcome to America's Car-Mart third-quarter 2014 conference call. The topic of this call will be the earnings and operating results for the company's fiscal third quarter 2014.

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 last night's press release which can be found on America's Car-Mart 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 1 of Part 1 of the company's annual report on Form 10-K for the fiscal year ended April 30, 2013, and its currently quarterly reports furnished to or filed with the Securities and Exchange Commission on Forms 8-K and 10-Q.

Participating in the call this morning are 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 Chief Executive Officer, Hank Henderson.

Good morning everyone, appreciate you joining us today. As you saw in our press release this morning, we have made a 2% adjustment to our credit loss allowance estimate, and I'm sure it will not come as a surprise to anyone familiar with the current competitive environment that we are operating with a higher loss level at this time. That's not to say we are satisfied with this level. We are working diligently to push it down. Although we are feeling the pressure from competition more than we typically have in the past, we do continue to see great opportunity to continue to grow our business in a highly profitable manner just as we have throughout the company's history.

Despite current challenges so far this year, revenue is up 8.1% over last with unit sales up by 6.7%. We've added over 4000 active accounts to our growing customer base, increased receivables by $37.5 million, invested $5.5 million in CapEx and repurchased $8.7 million of stock with an increase to debt of only $14.8 million. So this certainly shows our capacity to grow efficiently is very much alive and well and we remain as committed as ever to our future growth.

With regard to growth, we have opened 70 stores so far this fiscal year with our most recent being just yesterday in Troy, Alabama, putting our store count now up to 131. We have additional projects well underway and hope to have four more open by our year-end of April 30. We've opened a lot of new stores in the past few years and we feel we've really improved in this area as we continue to learn from each one. As there are a great number of towns to choose from for future locations, we will apply what we've learned and be even more selective as we go forward to help us through the best possible starts and long-term success of each new location. I'm going to go ahead and turn it over to Jeff now to give you more detail on the recent results and then come back later for a few closing comments. So Jeff?

Thank you Hank. Total revenues for the third quarter was right at $123 million, up 3.1%, made up of the sales increase of 2.1% and an increase in interest income of 11.7%. Same-store revenues decreased 2.8%. Revenues from stores in the 10-plus year category was down around 6%. Stores in the 5 to 10 year category was down about 2%, offset by a 47% increase in revenues from our stores less than five years old.

The challenging competitive environment is really putting pressure on our sales volumes, especially at our older dealerships. We do feel like the weather also played a part in the lower volumes for the quarter, but the effect is a little difficult to quantify. Our continuing efforts to sell less expensive vehicles should help with our volume challenges as we move forward.

Our average retail sales price for the quarter was down 0.6% from $9739 due to our continuing efforts to keep our selling prices down for affordability purposes and for competitive reasons. As always, we will work hard to supply our customers with fast, mechanically sound cars to meet their basic transportation needs. We will continue to target flat to decreasing overall sales prices in our efforts to keep our payments affordable with rational term lengths to increase customer success rates and further differentiate Car-Mart from the competition. We believe it is more important than ever for us to stick with our basic philosophy of earning repeat business by providing quality vehicles, affordable payment terms, and excellent service.

The down payment percentage was 4% for the quarter, up slightly from 3.9% or around $15 per unit sold. Collections as a percentage of finance receivables was 13.3% for the quarter compared to 13.4% last year. The initial contract term was down to 27.4 months compared to 27.8 months for the prior year quarter and up slightly sequentially from 27.3 months.

As we continue to work hard keeping the term length down and our customer equity up by offering some special payment options during the term of the contracts, including some tax time payment options. Our weighted average contract turns for the entire portfolio, including modifications, was 29.5 months, which was flat sequentially but up from 28.7 months at this time last year. The increases in turn from the prior year relate to our efforts to keep payments affordable for competitive reasons, and to continue to work with our customers when we experience financial difficulties.

For competitive reasons, our term lengths may continue to increase some into the future and we are committed to minimizing increases. We are aware of the downside that comes with increased term lengths and we remain committed to not stretching terms any more than we think is absolutely necessary to attract and retain our target customers. We will also work hard to keep our down payments up as this is a key to higher success rates.

The competitive environment, together with a tough macroeconomic environment that our customers are facing presents headwinds for us. We will stay focused on customer success and earning repeat business, and we believe that our future is bright.

The overall retailer units sold for the month per lot for the quarter was 27.7 compared to 29.4 for the prior year and compared to 27.6 sequentially. A quarter end, 48, or 29%, of our dealerships were from 0 to 5 years old; 24, or 18%, were from 5 to 10 years old, with the remaining 68 dealerships being 10 years old or over. Our 10-plus lots produced 29.7 units sold per month per lot for the quarter compared to 32 for the prior-year quarter, which was a 7% decrease. Our lots in the 5 to 10 year category produced 27.1 compared to 28.1, a 3.5% decrease, and our lots in the less than five year category had productivity of 24.5 compared to 23.8 for the third quarter of last year, which is a 3% increase.

Our productivity, especially in our older dealerships, continues to be negatively affected by macro and competitive factors. We will continue to focus on customer retention and repeat business and offering good quality, lower priced vehicles that are affordable under national terms.

Our more mature dealerships have a deep pool of past and current customers. We will continue to highlight the benefits of our excellent service and our local face-to-face offering to the market.

Interest income was up $1.5 million, 11.7% for the quarter, due to the $44 million increase in the average finance receivables. Delayed average interest rates for all finance receivables at the end of January was approximately 14.9%, which is flat with this time last year. But the longer contract terms had a positive effect on interest income and our ultimate cash returns.

Our gross profit margin percentage was 42.7% of sales compared to 42.6% last year and compared to 41.7% sequentially. The sequential improvement related to better wholesale results and lower repair expenses, offset by higher claims under our payment protection plan product. We will continue to focus on minimizing repair costs. The competitive environment does put some pressure on discretionary repair expenses.

Our goal is to balance affordability for our customers with appropriate gross margin percentages to enhance customer success. We expect gross margin percentages to remain generally in the current range over the near term.

For the quarter, SG&A as a percentage of sales increased to 18.1% compared to 17.7%. This is down from 18.2% sequentially. The $875,000 increase in overall SG&A dollars compared to the prior-year quarter related primarily to higher payroll costs and other incremental costs related to new lot openings. Additionally, we did incur around $300,000 in GPS expenses for the quarter, and ended the quarter with over 40% of our accounts having the products.

Overall, SG&A dollars have been flat the first three quarters of this year. We are aggressively managing our expenses and we do expect some SG&A leveraging in the future as we grow our revenues.

We will continue to invest in our infrastructure to support our growth. The GPS effort is a long-term infrastructure investment that will result in some unit cost savings but more importantly will enhance our operational efficiencies out in the field. When this project is completely rolled out, we expect the cost to be from $3.00 to $4.00 per account per month, hopefully closer to $3, as we work very hard to squeeze efficiencies out of this effort.

For the quarter, net charge-offs as a percentage of average finance receivables was 6.7%. That's up from 5.7% for the prior-year quarter. The increase for this quarter related mostly to higher frequency of losses pretty much across all age categories, about 90% of the increase, but we also saw an increase in the severity of losses measured as a percentage of principal outstanding which resulted in part from lower wholesale values at repo.

Our associates continue to do a good job of minimizing losses for those accounts that do default, but we did see a higher relative number of account losses due primarily to competitive pressures. We also think that the cold temperatures and the resulting higher utility bills had a negative effect on our customers' cash flows, which certainly didn't help loss rates.

Principal collections as percentage of average finance receivables for the quarter was 13.3%, down slightly from 13.4% for the prior-year quarter. The decrease in principal collected between periods can be attributed to the increase in the average turn of 0.8 months and the fact that we did modify a higher number of accounts, which was offset by some collection efficiency improvements that we saw during the quarter.

Credit losses on the income statement, excluding the effect of a change in the allowance, is higher for the quarter due to higher charge-offs. Slightly lower principal collections did have a very small effect on the quarter. Overall credit losses were about 25 basis points higher due to the shift in the relative age of the lots versus this time last year.

Tax time is well underway and we expect results from tax time to be fully consistent with what we've seen in the prior years. No tax money was received in this January, and we did receive a small amount in January of 2013.

We had anticipated and hoped that some of the intense competitive pressures on the front-end side would have started to decrease by now, and anecdotal evidence would say that maybe it should have. Unfortunately, we have not seen it at the ground level and we have to conclude that the ultralow interest rate environment and lack of alternatives is continuing to attract excess capital into our market.

The worst part is that good people are being put into bad deals and it becomes more difficult for us to help our customers succeed. We're not good at predicting when conditions may improve, so we are left to consider the current environment to be maybe more permanent in nature than we had previously thought. We hope that this environment is not permanent, and we're working very hard to build a great company in a very difficult operating environment. And if conditions do change, we feel like we are going to be in a good spot to take advantage.

Based on our elevated charge-off levels this year and especially this quarter and our expectation that conditions will remain challenging and charge-off levels will remain elevated, it is necessary for us to raise our allowance for credit losses to 23.5% from 21.5%. This non-cash charge will not affect our efforts to help every one of our customers succeed and our cash-on-cash returns are very attractive, even with the higher charge-off -- higher loss rates.

As discussed in our press release, we last adjusted the allowance in April of 2012 and prior to that, it was last adjusted in October of 2006. Once again, our cash-on-cash returns are very attractive and we are aggressively managing the expense side of the business in our efforts to be efficient and best in class with both our finance business and our dealership business.

Our diluted EPS for the quarter was $0.68, excluding the effect of the increase in the allowance.

At the end of the quarter, our total debt was $114 million. We have $29 million in additional availability under our revolving credit facilities. Our current debt-to-equity ratio is 54% and our debt to finance receivables ratio is 28%. We did repurchase 200,000 shares, or 2.2% of the outstanding shares, under our share repurchase program during the quarter, and we do plan to allocate capital to our share repurchase program in the future. Our first priority will be to continually grow the business in a healthy manner. We continue to keep an eye on the competitive landscape and future decisions on capital allocations will take this into account.

Now I'll turn it back over to Hank.

Thanks Jeff. I think the best news is that we do have an extremely experienced and capable team with an excellent track record that knows how to create positive change on both the sales and collection fronts, and I can tell you that all are intensely focused on moving things in the right direction at every location. We are extremely fortunate to have such dedicated associates, and we are greatly appreciative of all their hard work taking great care of our customers, and we have great confidence in their ability.

Now, despite the extra challenges presently, we feel very confident about our future. We have been able to grow efficiently and profitably for many years, and we have done so by not just looking at the next quarter or even just the next year. We put our eye constantly on where we want to be five years from now and making sure we're doing the right things today to get us there.

In these past five years, we've grown our receivables from about $225 million to almost $400 million a day, increased our active customer count by 20,000 and we are now selling almost 1000 more units per month. I'd say that's pretty impressive, so while it's true that we are feeling some additional pressures from competition these days, and I can't really recall a time when we weren't feeling some sort of pressure from somewhere, we do have an excellent team that continues to get better and better at what they do and our opportunity for these next five years is as vast and viable as it was in these past five.

We will continue to remain focused on the success of our customers so that we can earn their repeat business. This is a core value of our company that has gotten us to where we are today, and we fully understand our future success relies greatly on our ability to stay true to that value.

So that concludes our prepared remarks. We would like to move on to your questions. Operator?

(Operator Instructions). Kyle Joseph, Stephens.

Good morning, guys, and thanks for taking my questions. In terms of the same-store sales decrease, we saw it increase in the second quarter. Is that being driven by would you say competition, or was it more so the weather during the quarter? I know it's probably hard to quantify that, but can you give us your thoughts on that?

I think there are probably three things that play. Definitely the competition. And again, as Jeff described earlier, more at some of our larger stores that have typically in the past sold some of our what for us would be our more high-end cars, so it's where we've sold some of those that we feel the effects of competition more. Certainly weather across the South was -- we had a lot more weather this year than last. And also, as Jeff mentioned, we didn't really get any tax money in, in January this time, that creates a few sales, whereas last year we saw a little bit of that. So I think you have a few things at play that accounted for some of the lower sales in this recent quarter.

All right. Thanks. And I know you did mention that no tax dollars came in, but we saw delinquencies actually go down a bit year-over-year. Are you optimistic for a bit of a credit recovery or what drove that?

Such a small change, that can be as little as just on the day of the month that the quarter ended on. So we don't really put much value on that slight decrease on the 30-plus category. Although it was positive, it may have just related to the day of the -- the week that the quarter ended on.

Got it, thank you. So and then in terms of the provision going forward, would you expect it to stay around the 26% area?

I think yes. As we look at what's happened the last nine months to 12 months, we do consider the levels we are seeing now are going to be what we should expect out into the future.

Okay. And then we saw you guys start buying back more shares this quarter. Has anything changed in terms of your capital allocation strategies or thoughts there?

No. We continue to look at allocating capital to the repurchase program if it makes some sense. And we're going to continue to look at that as a good way to build value for our shareholders and no real changes on our strategy.

All right. Thanks very much for answering my questions.

John Rowan, Sidoti and Company.

When a loan defaults, what's the typical month in which that happens? Has that changed at all over the past year?

It's generally right around the 10th month on average, and it's been pretty consistent over the last couple of years. It maybe has gone up just a little bit but it's (multiple speakers)

The reason I ask is you said that the severity of your charge-offs has gone up. And we are in a period where we have longer loan durations and the average down payment hasn't changed much, the delinquencies have actually gone down. But you said the severity is up because wholesale prices are weak. I'm just trying to understand if maybe there's also a little increase in severity because you have longer loan terms and there's less equity in the vehicle throughout the lifetime of the loan, given that there hasn't been a big shift in the typical default period for a loan.

Yes, that certainly is -- the two components of the increase in severity are lower wholesale values at repo, and then the other component would certainly be a little longer term, so more outstanding principal at the loss point. So but the bigger factor this quarter was the decreased wholesale values.

And then Hank, you talked a little bit about loan terms that you're basically unwilling to match that you're seeing in the market. I'm wondering if you could give us an example of the types of loan terms that you think that your competitors use and that you think decrease the consumer's ability to complete a loan cycle and own a car.

Yes. Obviously, several of our managers share with us some of the deals that they see where they know they've lost some customers to. And we also know our customer just longer-term is going to mean more opportunity, more exposure to an event happening. And so when we see with some of our customers, they go out and sign up for some 60-month terms, we just feel like that's not very practical.

So there is an extreme difference between what we are talking about, so it's not like we could step up a little bit and match those. There's some pretty extreme term lengths out there that we are hearing about.

So the 60-month terms that you're seeing, that's on a comparable vehicle as far as age and mileage go versus what you're selling? Obviously (multiple speakers) useful life.

Not for that particular example. I would think that those, when we hear about those 60-months, those are on some later model lower mileage vehicles. But I can tell you we are hearing comparable vehicles of 48 months fairly common.

Thank you very much.

Jordan Hymowitz, Philadelphia Financial.

Thanks guys. A couple of questions. Can you quantify the lower wholesale values? What was the old recovery rate you were getting a year ago, two years ago on wholesale, and what are you getting today?

It was around 32% last year, and it's down to around 30% this year.

Okay. And what is the frequency of loss if that's a severity?

The frequency of losses on a static pool basis is --

Yes.

-- unfortunately is going to be above 40%. In the last 15 months, it's been above that.

So 40% would result in a 28% net number with a 30% recovery ratio.

It's about 40%, yes.

Okay. Second is the net charge-off number, is it 26%? Is that right? Is it 6.7% and then you have to annualize that?

The charge-off percentage for nine months is 19.8%.

No, for the quarter.

6.7%.

Right. So (multiple speakers)

There's some seasonality that's not necessary. You can't annualize one quarter. Each quarter is a little bit different.

But is the December quarter like an average quarter, because the first quarter is a better quarter and (inaudible) get to fourth quarter is a worse quarter. Okay, that makes sense.

Yes.

Okay. Then final question I guess the CFPB made some sort of accusation against the different buy here/pay here company regarding disparate impact charges for minorities on retail pricing for buy here/pay here. Are you familiar with that, and do you have any sense on what procedures and policies you've put in place in that regard?

I guess you are referring to Ally?

Yes. Well, all I want is the indirect company, but from what I understand there is a buy here/pay here company that's private that the CFPB charged actually they were using disparate impact on the actual retail markup of the cars.

No, we are not familiar with that. I can tell you our pricing of our car is based on what we pay for it. There's no negotiations. It's a one price and interest rate we charge all the customers is the same. So we are not exposed to some of those issues.

Yes, and they're both the same across the board in all markets, so there's no vary.

Okay, thank you.

Nick Zulovich, SubPrime.

Thank you very much, gentlemen. I just wanted to circle back to the competition question. Which metric do you see us putting more pressure on, getting the amount of down payment or lengthening of term. Maybe outside competition, which metric do you think that's putting more pressure on and why?

I don't think our primary pressure that we are feeling today is much from those. I think we feel it more on the loss side right now I think than specifically on the sales side. But if we focus just on the sales, I think it's probably the payment amount is the most attractive to customers that we are having difficulty competing with.

Which would relate to the term.

Yes, exactly.

Okay. And as far as acquiring inventory, there's been a lot of talk on the upper end of the wholesale market that off-lease volumes are going to increase this year and beyond. Have you all started to seek any trickle-down that some of the lower end inventory might become more readily available on the wholesale side? How much have you all seen that or what are your projections to acquire inventory?

Actually, as Jeff mentioned earlier, we've been able to bring down our average purchase price a bit and some of that a conscious effort to offer some cheaper cars in some of our stores, but given the typical seasonality we've seen in years past as prices tend to go up more this time of year, we haven't seen as much of that. So actually I think we are really strong solid on the inventory side and we haven't seen any big changes.

Okay. And finally, just in light of adjustments in this year's tax season, just what are your expectations for how this year's tax season might shake out?

I think we are on pace now to do a little better than last year. We've talked about it the last few years and each year we've been a little better at it. Our process gets smoother and certainly over time, some customers have been with us before, they've had a good experience, they've come back.

I think, year-to-year, the actual numbers that we will do ourselves will improve over last year.

We really try to look out for these customers too during tax time. And we realize they have other commitments, other obligations, and so we try to make sure that any special payments that we have out there are manageable and can allow them to get some other things squared up if they need to.

Very good. Thank you gentlemen.

Quinton Mathews, QKM.

Good morning. The first question is more of a macro question. Obviously, this is a tough environment, and presumably it'd be a better market if the economy picked up and normalized interest rates. But what would happen if we move to a high inflation environment? Would that kind of be a worst-case scenario for you guys? Higher interest rates, I would assume you have a cap, whether it be legal or just kind of structural, of what you can charge your customers on an interest rate, and certainly a high inflation environment would not be good for a lower income customer. Any comments on if we entered an economy high inflation?

We really just have an interest rate cap issue in the state of Arkansas, which is capped at 17%. We currently have $400 million of receivables and only $100 million of debt. So, the interest rate increase on our debt would be more than offset by the increase we might charge on the receivables side in states other than Arkansas.

We also get some benefit as a company from a lower interest rate. We have more customer success. Better customers consider that lower rate to be a very positive thing, so we don't necessarily work off a true interest spread by any means. And a higher inflationary environment would hopefully mean customer wages are going up and some of this excess capital in the market we've found other places to land, so there's some real positives for us in a higher interest rate environment.

Okay. When you look at -- are you seeing, whether it be any of your sales team or store level managers, attrition to competition -- is there a frustration level you are seeing that's above normal with people leaving the competition if they seek short-term opportunity?

No. We typically don't hire people that have been in the car business, and we don't really typically hire people that go back and forth between dealers or anything like that. So that's not been any issue for us.

Okay. And then when it comes to increased charge-off, obviously a portion of that is going to be macroeconomic, and people losing wages, weather-related. How much of that, can you quantify how much is people realizing that they can go and get a better deal with competition and lower their payment so they are dropping their payments or defaulting with you guys and moving to competition?

No, I can't exactly quantify that for you, but I can and will certainly tell you that it's very real. We actually have a handful of dealers and, again, primarily this is against some of our older stores, bigger stores that have sold cars more on the high end.

We actually have had some dealers who have attracted customers to actually leave our car on their dealership. One particular store these past few months, they've picked up four or five cars a month off of another dealer's lot. Obviously that's just wrong, so we know specifically this has happened.

Okay. And then on the bigger dealerships that are seeing the pressure, would you say that's largely demographic that the competition is going to larger populated areas that you guys are -- I mean, even though they're small relative to bigger cities, but they are going to higher demographic, higher populated areas and that's why you're seeing the competition, or is there something else that's driving the competition at those bigger stores?

I'm not sure what it is about these areas that makes them unique or have higher competition than others. Maybe it's just more dealers in the area would be my guess. But we certainly know that we see -- we are seeing the effect of the competition more in some areas where we have more aggressive dealers using this type of financing that's available than at others. And we have a number of stores that have seen double-digit growth year-to-year, so I don't think they are feeling the pressure. We have a couple of areas where we have a few stores in, and they are down a little bit year-to-year because of the additional tax. But as far as an overall trend of what makes it different, I am not certain.

And in the indirects, they do have field sales reps and they have added staff, so it would be a natural assumption that a lot of those staff and efforts are going to some more highly populated areas.

Okay. I hopped on the call late. You guys didn't (inaudible) guidance moving forward for this calendar year, did you?

No.

Okay. And then lastly, just to understand the connection clearly between the provisions and the charge-offs and your allowance, since you've increased that percentage of the provision, taking that hit to the allowance, that stays static until you change it again. So we should see the elevated provisions and the lower earnings on a kind of everything else being equal as far as revenues going forward until you change that provision either up or down. Correct?

Yes, that's just an estimated allowance percentage that if the pool were to run out, what we would expect to lose on net charge-offs going forward. Once you make an adjustment like we did this quarter, whether that reserve is at 23.5% or 21.5%, there's not a huge effect on earnings in forward periods from a change in that reserve amount. Of course, it does have a big effect on a one-time basis, but going from that point forward, it's not a huge outing for us.

All right, appreciate the time. Thank you.

Gene Neustadt, US Capital.

I would just like to ask you all a couple of questions about your buyback and how far in the future you think you're going to take that. Shares have gotten down to very few shares now. And also about stopping that buyback and instituting a dividend.

We've always felt like the best thing we can do for long-term shareholders is just to buy back stock. And as long as we consider it to be a good value on a long-term basis and we have the capital that we can allocate to those purchases, we consider a share repurchase to be better than a cash dividend, simply because it's going to reward those folks that are there for the long-term.

I've been in the stock long-term, but it's starting to get very illiquid, if you hadn't noticed. And I don't know that returning dollars to shareholders isn't as valuable with your shares down to 8 million, 9 million shares. Have you all considered reversing that?

No, we have not.

Maybe you should.

Okay.

Thank you.

Dan Furtado, Jefferies.

Good morning Hank and Jeff. Thank you for the opportunity. So I guess, on the competition side, if you were to stratify your portfolio into thirds, top/middle/bottom, would you say that the competition is equal in most of those, or are you seeing more pressure coming down from the top end, or how would you characterize that?

Definitely more from the top. And again, as we just said earlier, in some of our areas, I'll be specific on one. Central Arkansas is one of our more populated areas. We are in the Little Rock market where we have a few stores, and we know that in that particular area, we have excellent stores, excellent managers, been around a long time. And as an example, that is a market that we are feeling additional competition from. There's a lot of dealerships in that area.

And so it also says our older stores are the ones that have sold for us what would be our higher end, the more expensive cars. And the further up we go, that's where we feel more of the pressure from the competition. So, we have a number of stores that have grown very little from year to year that don't seem to clearly affect spot as much. But a lot of our, as a percentage, a lot of our volumes come from our bigger stores, and it so happens that's where we felt a lot of it.

Got you. And so taking that from looking at the loss rate, or expected loss rate, is it fair to characterize what you're seeing right now is in essence relative stability in loss rates in these three different kind of spectrums or segments? It's just that the top end is going away from you, or are you seeing weakening in the other two? You know what I'm saying? It's more of a mix shift, or is it an organic weakening of credit across this whole spectrum?

I think we felt it suspended really across the spectrum. It's more pronounced and maybe Jeff could quantify that a little bit.

Yes. We are seeing weaknesses across all age categories, as I mentioned earlier. It's none of our lots are immune to some of these higher charge-offs. The fact that our older lots represents 70% of our business, that's where most of the increase is coming from.

Right. I Was just wondering if maybe what's happening here is these three different kind of segments each have their own intrinsic loss rates and those intrinsic loss rates aren't really changing, but instead you're losing more customers from the lowest loss rate category at the top end. But it seems like that's not entirely the correct way to think about this.

No, unfortunately, it's not.

Okay. Thanks for the clarity on that, guys.

Joe Segrave, Benchmark Auto Sales.

Good morning guys. Thanks for taking my call. I have a question. As the money, you talk about competition often in the segment that came out, and as money is pouring into our marketplace in the likes of Wells Fargo buying deeper and deeper, what is the cutoff point you see there? How much of a squeeze are we going to anticipate? Are they going to start buying 450 Beacons with $2000 down, or do you see that cut off staying in the 550-plus Beacon range?

We are not really good at predicting that size of the market, because it's a part of the market we've not been in in the past, so we are certainly not experts on it. So, I would actually tell you we are far enough to (inaudible) I would say it's already gone down a little further than we would've expected.

And as far as the long-term prospect, I know with certainty I'm hearing of some deals that are impractical, and there's a level that's taking place that is certainly not sustainable. I think the end question is, for the long term, is it going to be more of an element of that left around for the long-term. But as where the cutoff is, I really don't know.

I understand. That's a hard question to predict because you can't predict the future completely. But I see a trend more and more towards them believing that technology allows them to buy deeper and deeper. And we are seeing levels of banks buying deep, as deep as they were in 2007 before the crash. And I don't believe that technology eliminates the need for collections and effective collection. I wanted to pick your brain on that, as to how do you see that playing out long-term. Because technology eventually, does it give them the boldness to buy deeper than they ever have in the past and deeper than we have ever considered they might?

I think it's obviously has given the boldness, but no, I'm entirely with you. We don't feel like there's any amount of technology that's going to make this viable for the long haul.

Our very best customers have a couple or three modifications during the term of their contracts. They've got an issue with the car, an issue with their personal financial situation, and they need some local help with that, whether it's repair or whatever. So that's hard to do unless you've got bricks and mortar out in these communities.

And I agree with that. In reflection actually, in fact, I'll agree with you there. I think it's a challenging market coming up, and I think that the boldness there that they are having, they are looking at numbers and they are saying all right, if I can get $3000 down on this vehicle, that's puts me at less than average black book and I'm going to buy that deal. Because if I have to reclaim my asset and take it to auction, I can get out of it and relatively minimize my losses because my repossession rates are lower. Everything about it, the cost associated with it is completely lower for the likes of Wells Fargo to get into our business more and more. And it scares me that, long-term, is that the trend we're going to see and that we're going to continually have to go to a lower and lower down payment on a lesser and lesser car? Because with $2000 down on a 480 Beacon, you can go buy a car at your local Toyota store.

It all comes back to the customer success. We're going to do whatever it takes to get most of our customers across the finish line, successfully completing their contract. If other folks don't share that viewpoint, then that's what we're going to have to deal with for a while.

Right. And so in terms of prediction of how long -- do we see another crash coming out? If they can't make money, if Wells Fargo can't make money at 1% on their loans, I've actually spoken with them, and they told us they don't -- they are not interested in the 760-plus Beacon. They want that 550 to 650 Beacon because they can charge 18% interest on it or whatever it is in your respective state, and because they can actually make $1200 on that finance rate. So do we foresee them getting to another crutch, which ultimately is good for our business, is good for the buy here/pay here industry.

Like I said, we're just really not experts on their business, but we know that even with their presence we still have very viable business and a good number of repeat customers. So we will continue to keep our head down and do what we do best and let the chips fall where they may with those guys.

Yes sir. Thank you for your time.

Jim Fowler, Harvest Capital.

Hi gentlemen. I'm sure I'm the only person on this call that doesn't know what that last gentleman was referring to when he was talking about Beacon. Could you just take one second and describe that? I thought that was very interesting, but I didn't know exactly what he was referring to. Thank you.

He was talking about credit scoring.

Is that an auto-related credit score that's different than, say, an Experian or how does it come about?

We don't use Beacon scores. We look at FICOs and Experian credit reports, so we wouldn't have any comment on that.

But how does one get a Beacon score?

We don't use those.

Okay, but how does one get one? Is it a bureau or is it a service, or --

I really can't speak to that. We don't use them. We don't do that type of modeling for our customers. We have our own systems. And so I'm sorry, I really couldn't help you with that.

Okay, great. Thanks guys.

At this time, I'm not showing any further questions. I'd like to turn the call back to management for any closing comments.

All right. Thank you all for joining us today, and thank you for your questions.

As we said, we've been at this business a long time, and we do have a good core group of loyal customers. We will continue to do our very best to take good care of them. We've got a strong team. We know what we need to do, and so we will get about the business of doing just that. So thank you all for your time and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may now disconnect. Everyone have a wonderful day.