America's CAR-MART Inc (CRMT) 2015 Q2 法說會逐字稿

Good morning, everyone. Thank you for holding and welcome to America's Car-Mart's second-quarter 2015 conference call. The topic of this call will be earnings and operating results for the Company's fiscal second quarter 2015.

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'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 1 of Part One of the Company's annual report on Form 10-K for the fiscal year ended April 30, 2014 and its current and quarterly report furnished to or filed with the Securities Exchange Commission on Form 8-K and 10-Q.

Participating on the call this morning are Hank Henderson, the Company's Chief Executive Officer and President; Jeff Williams, Chief Financial Officer. And now I'd like to turn the call over to the Company's Chief Executive Officer, Hank Henderson.

Good morning, everyone, we appreciate you joining us today. It is amazing what a difference selling just two more cars makes. With 136 stores now in operation, two more sales per month per lot makes a big difference. The increase added up to almost 1,500 additional sales over the same time last year, putting us at a revenue increase of over $12 million for this quarter over last year.

Obviously we are very pleased with the growth in sales. But what makes it even all the more satisfying is that we did so while actually decreasing our average retail sales price. Affordability is what our customers need and we are getting rewarded by doing a better job of providing that to them.

In our past several calls we've talked about the increased competition through the increased availability of financing and we would like to stop talking about it, but it is still there, it hasn't gone away.

However, by returning more to our roots and focusing on what we can do better than anyone, we're able to offer to our customers not only immediate financing but a selection of lower-priced, affordable vehicles that better fits their budget and can be paid off in a more reasonable timeframe than what is offered by some of the more aggressive financing that is out there now.

I might also note that we do so with a lower interest rate for our customers than we are seeing. Our face-to-face relationship with our customers gives us an invaluable competitive edge in both affective collections and also with cultivating repeat business which has forever been the cornerstone of our growth.

But while we are, of course, very pleased with our progress in sales, we are not satisfied with our progress on credit losses. They are flat with the last year and, while it may seem tempting to be satisfied with that given the challenges of the past year, we are not.

We understand that our customers' success is what ultimately guides our own success and we know we can do better. We are seeing some positive indications in our collections. Jeff will give you more detail on that in just a minute. But we haven't really seen it show up yet through reduced losses and so this is where our focus lies.

We recognize that we had to make some adjustments and execute better to get back to where we needed to be on sales and we have done just that. Our task at hand now is to be the best we've ever been at helping our customers succeed. So I will go ahead and turn it over to Jeff now for some more detail on our recent results.

Thank you, Hank. Total revenues for the second quarter was $134 million, that is up 10.2%. Same-store revenues were up 5.4% for the quarter and up about 5% from the sequential first quarter. Revenues from stores in the 10-plus-year category was up about 3.5%. Stores in the 5- to 10-year category was up around 11%. And revenues for stores in the less than 5 years of age category was up 40% to about $31 million.

The overall average retail unit sold per lot per month for the quarter was 29.6, that is up 7.2% from 27.6 for the second quarter of last year and up 4% from 28.4 sequentially. At quarter end 41, or 30%, of our dealerships were from 0 to 5 years old, 22 or 16% were from 5 to 10 years old with the remaining 73 dealerships being 10 years old or older.

Our 10 year plus lots produced 31 units sold per month per lot for the quarter compared to 29.7 for the prior year quarter, that is a 4.4% increase or about 1.3 units per month per dealership. And those lots were up from 30.7 sequentially.

Our lots in the 5 to 10 year category produced 29.4 compared to 27.4, that is a 7.3% increase. And the lots less than 5 years of age had productivity of 27.2 compared to 22.6 for the second quarter of last year, that is a 20% increase. These younger lots were up about 11% sequentially.

The improvement in productivity for the younger stores was driven primarily by improved sales execution and another year of seasoning for our dealerships in Alabama, Kentucky and Tennessee. At this point we are attributing the top-line improvements to overall solid execution and our focus on lot-by-lot productivity results and also we may be seeing some indirect benefits of lower gasoline prices.

Competition is still very intense and we will continue to focus all of our efforts on customer retention, earning repeat business and offering good quality vehicles that are affordable under rational terms. We believe we serve our markets better than anyone and customers truly benefit when they choose Car-Mart.

We will always strive to find just the right balance between sales volume and credit risks with a goal of helping as many customers as possible successfully complete contract terms and owning their vehicles. Our continuing efforts to sell less expensive more affordable vehicles is certainly helping with the volume side and allowed us to see nice SG&A leveraging of our fixed cost structure.

Selling less expensive vehicles is the direction we need to continue to go as it reduces the cash cost of running the business in addition to the positive affordability effect for our customers. As previously discussed our new 12-month service contract will increase our ASP's in the future as we continue to roll this new product out. It is priced about $200 higher than ours shorter-term contract.

As always we will focus on basic transportation needs and we know that we can compete much more effectively at those lower price points. We will continue to target flat to slightly decreasing overall sales prices in our efforts to keep our payments affordable with rational term lengths to increase customer success rates.

Our down payment percentage was 6.7% for the quarter, that is up from 6.2% or about $47 per transaction. Higher down payments contribute to better credit results in the future.

Collections as a percentage of average finance receivables improved to 14.1% from 13.6% last year. This is the second consecutive quarter for improved collection percentages. Our average initial contract term was up just a little bit to 27.5 months compared to 27.3 months for the prior year quarter and 27.2 months sequentially.

While we will always work hard to keep the term length down and customer equity up to help success rates, we also are focused on the affordability of the payment in light of competition, especially as we strive to increase volumes at our older dealerships which have been the most affected by increased competition recently. With that said we don't consider the slightly longer originating term to be a negative.

Our weighted average contract term for the entire portfolio, including modifications, was 29.6 months, which was up slightly from 29.5 months for the prior year quarter and flat sequentially. The weighted average age of the portfolio was 8.4 months at the end of the current quarter compared to 8.2 months at this time last year.

For competitive reasons our term lengths may continue to increase some into the future, but we are committed to minimizing any increases for obvious reasons.

Our gross profit margin percentage was 42.9% of sales compared to 41.7% for this time last year and from 42.3% for the first quarter. The increase related to the benefits of selling lower priced cars which carry a higher gross profit percentage, lower relative wholesale values -- wholesale sales and lower repair costs as we are doing a good job in the field of managing repair expenses.

We did have lower margins on the payment protection plan product and the service contract products which did offset some positives on the gross margin line. As we stated previously, we expect the new 12-month service contract to not only help more customers succeed, but it is also expected to have a slight positive effect on overall gross margin percentages once fully rolled in.

Once again 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 decreased to 17.3% compared to 18.2% for the prior year quarter. The $1.1 million increase in overall SG&A dollars compared to the prior year quarter related primarily to higher payroll costs and other incremental costs related to the new lot openings and infrastructure costs to support our growth.

Additionally, we did incur around $530,000 in GPS expenses for the quarter, that is up from $280,000 for the prior year quarter, and we ended the quarter with right at 76% of our accounts having the product. We are aggressively managing our expenses and we continue to expect some SG&A leveraging in the future as we grow our revenues.

Net charge-offs as a percentage of average finance receivables was 7% which was up slightly from 6.9% for the prior year quarter. The increase related to higher severity of losses which resulted mostly from lower wholesale values at repo. Frequency of losses as a percentage of average number of accounts was flat as we did a good job of working with our customers to help them succeed.

Competitive pressures, both at the point-of-sale and at default point, the prolonged negative macro factors for our customers and the fact that we have many newer dealerships are contributing to the higher losses when compared to historical levels. However, as we expected, we are seeing a leveling off of losses on a quarter-to-quarter basis and are hopeful that the hard work going into the collection side of the business together with better deal structuring will lead to higher customer success rates down the road.

Once again, principal collections as a percentage of average finance receivables for the quarter was 14.1%, up from 13.6% for the prior year quarter. The increase in the principal collected percentage resulted from lower delinquencies, the average age of the portfolio was slightly older, contract modifications were down significantly.

Also lower gasoline prices most likely had a positive effect and we think our lot level execution with the collections is a little better, offset by slightly longer overall contract terms and the fact that the average percentage of AR current for the quarter was down slightly from 81.8% to 80.5%.

Excluding the effect of the approximate 200 basis points increase on our provisioning for new receivables, if you'll remember, we did increase our reserve for loan losses at the end of the third quarter last year and we've been provisioning at a higher level since then. Our credit losses on the income statement would've been down a little bit for the quarter.

For credit losses we saw a slight improvement with our 10-plus-year and our less than 5-year-old dealerships offset by slightly higher losses for our 5 to 10 year old lots. The negative credit loss effect from the shifting of the average age of our dealerships was around 30 basis points for the quarter.

As we look forward we are focused on having better collection results in our third and fourth quarters. Of course the competitive landscape during the upcoming tax season will play a big role in this, but we do plan to execute well. As mentioned, contract modifications are down compared to this time last year and our accounts over 30 days past due are sitting at 4.4% compared to 4.7% at this time last year.

At the end of October our total debt was $106 million and we had $36 million in additional availability under our revolving credit facilities. Our current debt to equity ratio was 48.4% and or debt to finance receivables ratio was 25.9%. We are very encouraged by our productivity improvements with our older dealerships and we continue to keep an eye on competitive landscape and our future decisions on capital allocations will take this into account.

We did repurchase around 181,000 shares of our stock during the quarter for $7.5 million. And once again, we have repurchased right at 3.5 million shares or about 30% of our Company since February of 2010. And now I will turn it back over to Hank.

All right, thanks, Jeff. So all in all it was a very good second quarter; it was a continuation of the improving results we had from our first quarter. So sitting here now at the halfway point for a year we are back on track to have an excellent year -- and that is a good place to be.

However, our primary focus doesn't lie on the immediate quarter or just these next six months. We feel confident we have the right people and processes for that. We have been in this business long enough and been building this Company long enough to know very well that we need to be looking out over the longer term, asking ourselves what we must be doing today to assure we are prepared to effectively service our customers when we have 200 stores, which won't be too many years away.

Just having a good quarter or two is not what creates more opportunity in the future for our associates. It is by growing it the right way for the long-term, assuring that we will always be the solid successful Company that we are. Creating opportunity for advancements for our hard-working associates has always been a vital part of our culture and we are committed to preserving that concept by keeping focused on the long term.

And speaking of growth, we have open two more new stores so far this year, Dothan, Alabama and Hickson, Tennessee. And have three more in the works, two of which will likely open up during this present third quarter, Ada, Oklahoma, Miami, Oklahoma and also a project one in Valdosta, Georgia.

I can't say enough good things about the work our expansion team is doing. Our new locations are looking better than ever and they are bringing them in below our projected budgeted amounts. So hats off to [Ted Taylor] and his team.

We do have a lot of work presently underway in several areas to assure we are equipped to handle our future growth. We have made substantial investments in our operational software and our IT infrastructure over the course of the past couple years to improve efficiency and sales and collections for better customer service. And also to assure the best possible support for all aspects of our compliance management systems.

Of course the most important aspect of preparing for future growth is preparing future managers. We presently have 18 future managers in training along with several assistant managers in place who have their sights set on managing their own store some day.

Our training team is doing an excellent job of providing basic training and certification. And we have a group of very tenured general managers who are mentoring these future managers in training, imparting their experience to help them be as prepared as possible for the day they get their own store.

So that concludes our prepared remarks. So now we would like to move on to any questions you may have. Operator?

(Operator Instructions). J.R. Bizzell, Stephens.

Congrats on another great quarter.

Thank you.

My question I would like to ask is kind of, Hank, if you will, the sales cadence during the quarter, given we saw nice acceleration in the cars sold per lot per month, I am just wondering if that was kind of an even growth throughout the quarter or you saw it kind of back end loaded/front end loaded. Just some color around that, if you will.

You know, during Jeff's comments he mentioned that we are attributing our improved sales to better execution at the lot level. I will tell you that there have been times in years past where we've had some stores really blowing it out while others not performing as well. But that has not been the case.

Here recently we have really had solid sales across the board. And I would have to say I think it has been just about as consistent as it has ever been and not particularly weighted one direction or the other. So, and that to gives us an extra layer of confidence to know that we're doing sales the right way when they are not all compacted. So I think we are very solid.

Yes. And we had -- all three months in the quarter were solid too, so it was a good quarter all the way around.

Great, thanks for the color. And then kind of building on that, Hank, I know you're talking about kind of leveraging that middle management. I'm just wondering, how early in the process do you think you are? Is it something that you think you are done implementing it and now it is just a matter of it seasoning across the portfolio? Or how should we think about that? And kind of what have you been focusing on with that middle management to focus on at the lower-level, if you will?

That is actually an excellent question. Well, we have been working on it for about 30 years trying to figure it out, to tell you the truth. But really, and I would say in the course of the past two years, we have reached the size where more and more it becomes more evident that -- how important and such a key role that middle layer is. And I would say our emphasis to that group has really been solid performance at each location.

We are not looking for one store to pick up sales where another one may be light. But it's that we get solid performance from each. And I know that may seem very, very simple, but it has in our focus. We are not focused on just, okay, here is the big number we want to hit as a Company. But it is a little more granular. We are really focused on each store carrying their weight. And I think that has a lot to do with the better results we've had the past couple of quarters.

And then last one for me, kind of switching gears now. You talked about recoveries and just wondering if you could kind of talk to us about residual values, what you are seeing out there. And then ultimately how you all are thinking about it long-term for your business model?

Yes, certainly. The percentage recovered on a repossession has gone down. This time a few years ago it was in the low to mid 30s as a percent and we are in the upper 20s now. So recovery values certainly are lower, which is hurting us on the severity side.

We are trying to do all we can on the collections efforts to make these transactions affordable and to provide really good service to those customers after the sale so that we have fewer losses which we have had some good success there. But we are not expecting any big improvements on wholesale values going forward and not any significant reductions either.

We don't -- since our car is of a lower price there is only so far it goes down in value. So we feel like we are fairly settled in on that recovery value, but it is several points lower than it was a few years ago. And it is probably costing us $140 per loss in reduced values on the wholesale side.

And then when purchasing those cars I'm guessing are you starting to see prices come down or are you starting to get a higher quality car for a better price point? Or is that something that we should think about maybe next year?

I think that certainly it is helping us on that side. On the sales side prices have been -- prices and availability have been good and we do expect that to continue to be a benefit for us as we look out into the future.

All right, guys, great, thanks.

Elizabeth Suzuki, Bank of America-Merrill Lynch.

Good morning. Just a question regarding the average age on how that has been trending on the vehicles you are selling. Because the press release mentioned that you got a better assortment of lower-priced vehicles. So are those lower-priced vehicles just older or is the pricing of your core 6- to 12-year-old vehicle category just coming down in the market?

Well, the average age of the vehicle we are selling has certainly drifted up over the last few years and the mileage on those cars has also come up some. But each year that goes by the quality of the car from 10 years ago also improves.

So we're not seeing any big negatives on the repair side from selling a little older car with more miles on it, but the lower price cars we are selling, it's more of a basic transportation, whereas some of the higher price cars might be more of an SUV or a truck category.

So we are pretty happy with the quality of what we are putting out there as evidenced by our lower repair expenses. And just feel like we've maybe missed the market a little bit in the last few years on some of those lower-priced points for customers really just looking for good basic affordable transportation with a lower payment.

Okay, great. And can you just talk about how Car-Mart has been responding to competition on the lending side and were there -- were sequentially more favorable terms partly responsible for the improving comps or is that really just store level execution?

First of all I think I would have to say we think the lion's share of it is certainly in better execution. But actually the point that we were just talking about with more offering of affordable cars, the lower end, that has definitely picked up some sales, it's what people need. The financing is certainly available, but affordability is not necessarily all available everywhere.

And if you really look across our mix, we have actually sold a handful more up at the higher end. We sold several more at our lower end and a little bit less with what would typically be our middle mix.

And so, I guess to say that I think we just had a little bit broader offering, but certainly what we are seeing that people want are those that are more affordable and that they can get paid off more quickly than signing up for some of the long-term offerings that are out there with some of this other financing.

Okay, great. And just one last one. Have you noticed any real change in the competitive environment just from the last quarter? Are there any dealers and lenders that are getting more aggressive then you had seen in the course of the first quarter?

I wouldn't say that we have seen any dealers getting more or less aggressive, I wouldn't say any change there. We haven't seen -- we talked about it about a year or so ago that we were seeing some drop offs, we were experiencing some more losses because of the additional financing that is out there and that has subsided quite a bit.

So my guess is that a lot of people who wanted to run out and -- when this financing came available a lot of people who wanted to have now signed up. Keep in mind we are in small towns. And so I think that some of that kind of sold ahead of itself. So that has less -- that part of the pressure has lessened a bit for us.

Okay, that is very helpful, thanks.

Thank you.

John Hecht, Jefferies.

Thanks very much, guys, and congrats on a good quarter. First one, just -- I guess you answered this to some degree in the last inquiry. But the -- you guys are doing a good job at keeping down your cost of inventory and controlling margins or maintaining good margins in that realm.

And I am wondering, can you tell us how much of that price relief at the inventory level is related to declining values of used cars versus a change in the mileage or age of the cars you are buying versus just improved negotiating power and execution on your side?

Well, I think first and foremost it's just our choice to buy cheaper cars, that is what people want, more affordable cars. And certainly as we do that we are going to have our average age in mileage is going to be a little higher. I'm sorry I don't have an exact number for you. But just most of that change has just certainly been in our own efforts to offer more affordability.

I do think it is very reasonable to expect over the course of the next few months, because people will start getting their inventory ready for the tax time, we know that's a big sales time. And just talking with some of our guys, they have already started seeing some of the more ideal vehicles' prices going up.

So I think what we have got ahead of us for a few months is prices are going to go up. And then hopefully that we get past the tax time and out of our fourth quarter and they will flatten back out.

And then I mean is there any notable difference in kind of the mechanical issues you are having in the portfolio as you have gone out a little older in the car with more miles? Or has the quality of vehicle improved to the point where it is not making a difference in that regard?

As Joe pointed out, our cost of repairs is actually down. So I think your guys are doing a great job. We have to -- you certainly do have to look at more of those cars and turn more down, we are selective in what we buy. So it actually is harder work for our purchasing team out there, they have done a good job.

And I think part of it too when you are buying a car that is a little older, a little more miles on it, you probably check it out all that much better. You've got to be a little bit more wary to make sure you're getting a good car for our customer. I think it is working out well for us.

Okay, great. And then looking at the increase in unit sales at the lot level, pretty big jump. Is there any specific program -- I mean you had mentioned execution there, but was there any specific programs or marketing efforts to new or recurring customers? And can you give us a little bit of data was there pickup in the new customers or was it just better retention of recurring customers?

I would say that our sales for repeat business was solid, it stayed about on track as it usually has. We are like every other dealer, we always have some sort of sale or special, something going on. So I wouldn't say there was anything out of the ordinary. I just think we are doing a better job.

I would point out, and without getting into too much detail, I had mentioned it before -- we've gone through a time where we had some manager turnover. I feel like we have done a fantastic job there. We brought it way down, so we've got more consistency at the stores, we have more consistency with our area manager ranks. And again, for us it works out to a couple more sales per store. So it is not really a radical difference at the lot level, just a little better adds up.

Yes. Okay, guys, thanks very much.

Thanks, John.

John Rowan, Sidoti & Company.

I just want to understand the impact on cash collections, because duration it looks like was up a little bit year over year. Charge-offs were roughly flat, just down a hair, but your cash collections were actually up quite a bit. Just want to understand how that happens.

Well, John, that just -- for the most part the accounts that are paying us are paying us better than they did. We have seen modifications go way down, delinquent accounts are down. The average term is pretty flat, but the average age of the portfolio is up a little bit.

So each dollar collected goes more to principle and I feel like we just had better overall execution on the collection side for those accounts that are paying. And certainly we got some benefit from gasoline prices being down.

Did you change any collection practices within the quarter?

No, we did not.

And then can you remind me kind of when you started with the GPS rollout, where we stand on that? And if there was any benefit in the quarter from a credit standpoint?

We started about a year ago with certain lots and we are 70% -- 76% rolled out at this point. It is really hard to quantify benefits from the product on the credit loss side.

We know for a fact that the efficiencies we gain from the use of the product as we grow from an operational standpoint it's something that we just had to do as an infrastructure investment to support the efficiencies of dealing with 65,000 accounts or 100,000 accounts, it is a product that we had to roll out. But as far as seeing any credit loss benefits at this point, we can't say that we have.

The whole goal was to be able to deal with delinquent accounts much sooner when they become delinquent and save those accounts and get those customers back on track. But the charge-offs are still higher than we'd like. They have flattened out, but they are still much higher than they were a few years ago.

So I guess we could say that maybe without the product the charge-offs would be even higher. But at this point we are not seeing any benefit related to historical charge-offs levels. But we do know we are getting some good efficiencies out of it and we hope as we continue to work on better utilizing the products that maybe we will see some credit loss reductions in the future.

Okay, thank you very much.

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

Good morning, Hank and Jeff. Nice quarter. As far as vehicle condition and charge-offs, so you've had rising charge-off rates over the last couple of years and concurrent with that you've also had higher mileage and somewhat older cars. So has -- are the percentage of loan defaults that were caused by or triggered by mechanical breakdown, has that been increasing during that time as well?

No.

No. I think the quality of the car -- each year that rolls by, as we mentioned earlier, the quality of a 10-year-old car is pretty high. There is a lot of life left in the car we are putting out there. And each year that rolls by the quality from 10 years ago goes up. So -- and again, we've seen some nice recent results on repair type expenses, so we've not seen any negatives on that side from that more affordable car.

And I would just emphasize again, we do have to really give a lot of credit to our guys that are out there buying the cars because you do have to be more selective with those. And I think that is exactly what we have done. We have been more selective when we are buying in that range and it is working out for our customers.

Got it, okay. And your collection rate was up, you mentioned modifications were way down. Is that a result of more intensive collection efforts or are you seeing maybe perhaps a better quality, credit quality of customer coming in? Or maybe there was an improving job market, lower gas prices, maybe customers are just able to -- better able to make their payments. What do you think is driving that?

I think you named it all. I think it is all of those things have an impact. It is hard for us to discern exactly from store to store which has the greatest impact. But ultimately what it means for us is the accounts are more solid and that the delinquency numbers that we have are very accurate. So nothing is just set off in there. So we feel really good about our account.

Okay. And then last question on gross margin, just under 43%, that is the best quarterly margin you have had in a few years. And you kind of mentioned some of the reasons. Do think that is sustainable, that 43% range? Because you have been in kind of the 41%-42% range for the last few years. Do you think 43% is something that is sustainable going forward?

Yes, it is a little hard to say. It was a good quarter and we did receive a nice bump from just the volume increases. But certainly something above 42% is maybe -- we have been saying 42% for some time now but maybe it is slightly above that.

I hate to commit to much more than that at this point because some of the good results this quarter did relate to the significant increase in volume and the relative reduction in wholesale sales. But we did have some nice results on the repair side again that we hope continue. But we would love to say it is going to be closer to 43%, it is just maybe a little too early to say that.

Okay. And then actually that brings up just one last question, sorry to keep going on. But on the higher volume, was that a function of more traffic coming through your stores or better conversion rates of converting the customers who did walk into your stores into buyers?

I think going back I think we are doing a better job at the store level with the whole sales process. And I think we certainly -- for this past quarter we had a better supply, better stock of the lower price cars and that certainly made a difference. But I really primarily attribute the increase to our folks just doing a better job.

Okay, great. Thank you very much.

And I'm not showing any further questions in the queue at this time. I would like to turn the call back over to management for closing remarks.

Okay, well again, thank you all for joining us today. We are proud of what we have had so far this year, but we are going to get back to it and look for good things in the future. So thank you all and have a great day.

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