America's CAR-MART Inc (CRMT) 2017 Q2 法說會逐字稿

Good morning everyone. Thank you for holding, and welcome to America's Car-Mart's second-quarter 2017 conference call. The topic of this call will be the earnings and operating results for the Company's fiscal second quarter of 2017.

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 Part 1 of the Company's annual report on Form 10-K for the fiscal year ended April 30, 2016 and its current and quarterly reports furnished to or filed with the Securities and Exchange Commission on Forms 8-K and 10-Q.

Participating on this call this morning are Hank Henderson, the Company's Chief Executive Officer, and Jeff Williams, President. Now, I would like to turn the call over to the Company's Chief Executive Officer, Hank Henderson.

Good morning and thank you all for joining us. As you can see in our press release this morning, we put together another solid quarter with net income of $5 million for $0.62 a share.

We are very pleased with the sales for the quarter. Revenues were $150 million, which is an increase of 12.9% over the same time last year. Retail unit sales were up 11.8%, putting us at over 12,000 retail sales for the quarter. Average units sold per month were up significantly for all of the store age brackets, which Jeff will give you more detail on in just a minute.

And it is particularly encouraging to see the sales increase at our older dealerships. We know from experience many of these stores have a lot more capacity, and it is nice to see that we are getting some of that back.

We're also seeing some very positive results from our efforts to improve inventory management, reduced repair expense, along with the lower number of wholesales made for a nice increase in our gross margin compared to where we were last year. We are at 41.4% versus 39.2%.

We are doing a much better job with how we are spending our money on parts and repairs, and we still have room for improvement in that area.

We've also tightened up our policies and procedures regarding high inventory units during the course of this past year, and that is making us much more efficient. We sometimes can forget we can actually do more with less if we do it right, and we have been making progress getting that balance more in line with the true optimum point.

So I'll go ahead and turn it over to Jeff now to give you more detail on our recent results and then I will come back to you with a few final comments.

All right, thank you Hank. As Hank mentioned, total revenues increased 12.9% to $150 million with same-store revenues up 11.6%. Excluding the effect of the four dealerships that we closed during the fourth quarter of last fiscal year, revenues were up about 14%.

Revenues from the stores in the 10 plus year category was up around 12%. Stores in the 5 to 10 year category, revenue was up about 10%. And revenues in our stores that are less than five years old was up about 25% to $32 million.

The overall average retail units sold per month per dealership for the quarter was 28.4. That's up from 25.3 for the second quarter of last year and up from 27.9 sequentially.

We do feel that our productivity improvement is even more impressive given the fact that our customer base might be just a little fatigued after so many years of lose credit with extended terms, so very happy with topline growth.

At the end of the quarter, 37, or 26%, of our dealerships were from 0 to five years old, 23, or 16%, were from five to 10 years old, with the remaining 83 dealerships being 10 years old or older. Our 10 year plus lots produced 30.8 units sold per month per lot for the quarter compared to 26.8 for the prior-year quarter and compared to 30.6 for the first quarter. Our lots in the five to 10 year category produced 25.5 compared to 23.3 for the prior-year quarter, and compared to 26.5 for the first. And the lots in the less than five year age category had productivity of 24.7 compared to 22.6 for last year's second quarter and compared to 23.1 for the first quarter.

As Hank mentioned, our older dealerships are in a good position to take advantage of market opportunities for increased volumes as we look forward.

Our average selling price increased 2.4%, or $244, to $10,491 compared to the prior year and increased $98, or 1%, sequentially. The increase from the prior year relates to general increases in selling prices as we work to improve the quality of our vehicles.

Also, we continue to move a lot of trucks and SUVs, which are in high demand, and for the most part carry higher average selling prices. We currently anticipate some increasing overall sales prices for the near term as demand for the cars we buy is high, especially for trucks and SUVs.

Our down payment percentage for the quarter was 5.6% compared to 6.4% for the prior year. The decrease was offset by improvements in special payments on the front end.

Our average initial contract term was up to 29.1 compared to 28.4 for the prior-year quarter. That's a 0.7 month increase, but down slightly from the first quarter's 29.3. The increase for the second quarter -- the increase from the second quarter of last year relates primarily to the higher average selling price.

Our weighted average contract term for the entire portfolio, including modifications, was 31.7 months, which was up from 30.6 months at this time last year and flat sequentially. The weighted average age of our portfolio was 8.5 months, flat with the prior year, and up from 8.4 months sequentially. Due to the increasing selling price and for competitive reasons, our term lengths may continue to increase some into the future, but we are committed to minimizing any increase. As always, we will try to ensure that the term length and the useful life of the vehicle are in alignment, and we will continue to put our customers in good vehicles.

Interest income was up $1.7 million compared to the prior-year quarter due to the $41.2 million increase in average finance receivables and, to a lesser extent, to our increase in the interest rate on our contracts to 16.5% from 15%, which began in May of this year.

The weighted average interest rate for all finance receivables at the end of the quarter was approximately 15.47%. That's up from 14.9% at this time last year.

For the quarter, our gross profit margin percentage was 41.4% of sales. That's up from 39.2% for the prior year. That's a 220 basis point improvement. The improvement relates primarily to lower wholesale sales and losses and lower vehicle repair expenses.

Our continuing efforts to improve the quality of our inventory and improve inventory turns and efficiencies is having a positive effect and will benefit us as we move forward. We had been very aggressive with inventory quality, repair costs, inventory turns, stale inventory, and our efforts are certainly showing up with improved gross profits. We will keep pushing for improvements with inventory management, and we will focus on keeping our gross margin percentages up. As always, we do a lot of work to earn our margins and we need to execute at the very highest level in this area of our business.

As we continue to work on our blocking and tackling with inventory management, we are optimistic that increased supply and decreasing wholesale prices will put us in a better position and will result in more cars, more quality cars, at lower prices for us as we go forward.

For the quarter, SG&A as a percentage of sales was 17%. That compared to 18.9% for the prior-year quarter. We certainly saw the leveraging benefit from the topline growth, and we continue to believe we have a very lean but effective cost structure, and we will focus on cost controls as we move forward. At the same time, we will remain mindful of how important it is in this high-touch business to ensure that our infrastructure is solid to support our customers before and after the sale in an effective manner.

For the quarter, net charge-offs as a percentage of average finance receivables was down to 7.7% from 7.8% for the prior-year quarter. Both frequency and severity of losses was basically flat. Our wholesale value recovery rates continue to come under significant pressure. Our recovery rates for the quarter were again close to 23%. That's still historically low and well below the low points that we saw during 2010 with our coupes and sedans and basic cars dragging down our percentages.

Principal collections as a percentage of average finance receivables for the quarter was 12.6% compared to 13.7% for the prior-year quarter. This decrease resulted mostly from the longer average contract term, higher levels of contract modifications, slightly higher delinquency rates and, to a lesser extent, to our increase in our contract interest rates. The lower collection percentage resulted in almost a 100 basis point increase in the provision for credit losses on the income statement as we reserve at 25% of uncollected AR. We continue to believe that we are selling a higher quality vehicle, a slight improvement with age and mileage to a better credit risk customer.

As discussed earlier, we have seen great execution improvement with our inventory management, and we do expect to continue to move the needle in a positive direction with similar efforts in our collections area and resulting increases in customer success rates. But this area has been more affected by external competitive forces.

We don't know what the competitive landscape looks like in the future, but we plan to run our business efficiently and effectively with an eye towards solid profitability and growth. We know we can do better with our credit results, and we are committed to making that happen.

Once again, we believe that access to better cars at better prices will have a positive effect on our credit losses as we look forward.

At the end of October, our total debt was $124.7 million. We repurchased about 25,000 shares during the quarter for about $900,000. Our current debt to equity ratio is 53%, and our debt to finance receivables ratio is a very healthy 26%.

We had $45 million in additional availability under our revolving credit facilities at the end of the quarter. And in the last 12 months, we have repurchased $18 million of our common stock. We've increased finance receivables by $47 million with about a $20 million increase in total debt. So still very focused on cash flows and proud of where we are at.

Now I'll turn it back over to Hank.

Thanks Jeff. We are obviously pleased that we are putting together much better bottom-line results but, at the same time, we know we can do so much better. We've made some very positive improvements in most areas of the business. However, we have made a great level of progress with regard to our credit loss as that area was relatively flat, and that is of course also the most challenging piece of our business and does require the greatest energy and expertise. And that expertise does obviously require a certain level of experience. As we currently have a number of relatively newer general managers, it's imperative that we assure that each one of them are receiving the best possible training, leadership, and support as they are gaining their much-needed invaluable experience.

While most of that guidance is provided by our area operations managers and our regional VPs, we have also added a couple of additional trainers out in the field to help support the effort at this time. Each of these individuals has many years of experience in lot operations with our company, and are working with their newer general managers to impart their experience and assure that each general manager has the best possible processes in place at their store to help them be as efficient as possible.

We do recognize that our general managers have a challenging job, and we are working hard to improve the level of support we provide to each of them in every area. At this time, we need to allow this group of newer managers to season more and keep our resources focused on supporting them while they get more experience under their belts so that, as we begin to open new stores, we can be more confident that our existing stores are operating as efficiently as possible.

We've always been about growing our Company and creating new opportunities for our associates. We have great capacity within our existing store base to continue to grow our top and bottom line, and that is our plan.

So, that concludes our prepared remarks, so we would now like to move on to your questions. So operator?

(Operator Instructions). Elizabeth Suzuki, Bank of America.

Good morning guys. Looking at used vehicle pricing, the latest from the NADA showed some softness in used vehicle pricing for four-year-old vehicles and older. Are you starting to see any increased availability or more reasonable auction prices than you had seen in the last few quarters, or is pricing still pretty high for vehicles that you're purchasing?

We are starting to hear some news from the field. The prices certainly aren't going up at this time of year like they normally do. So, I think that our folks are optimistic that we are going to be in a position to buy a better car for the same or less money this year compared to what we've seen in prior years. It's not anything huge at this point, but we are starting to hear that that is happening in certain places, and certainly that's what we've expected to happen for a while.

Great. And how did your recoveries trend in the quarter? We are seeing some improvements in salvage values, so I'm wondering if that helped your gross margin in the quarter at all.

Maybe just a little bit. We are still around the 23% recovery rate, which has been fairly consistent for the last few quarters. So we kind of think we've reached bottom there, and we'd love to see that come back up a few points and do expect maybe a little improvement there in the next couple of quarters.

Okay, great. And just one last one, which is you may have mentioned this at the start of the call, I joined a little bit late. But what are you seeing in the competitive environment for auto finance? Because we are starting to see some tightening of auto lending standards at banks, and particularly in the subprime space. So, I'm wondering if you are seeing that as well.

Obviously, we are hearing the same things but at the ground level talking with our general managers at the store level. They really aren't seeing a big change yet. The competition that's been out there seems to continue to be aggressive.

I think what we are seeing more of, and one thing that's helping us, is this has gone on long enough that there's been kind of a cycle with our customers. I think we've had some who have been over and tried that, and more recognize that our face-to-face local presence is more of what they need, and also our terms are much shorter. The relationship is important to them. So I think we are seeing some customers have kind of cycled through that, and so we are getting some benefit from that, but can't really speak to specific loosening up on the competitive front.

Great. Thank you.

Bill Armstrong, CL King & Associates.

Good morning Hank and Jeff. So, on your top line, you haven't seen any serious change in the competitive financing environment, and pricing hasn't really changed all that much. What would you attribute that very strong 11.6% same-store unit increase to? What would you point to maybe as the top one or two factors?

I think there's a few. I think one of the things that I just mentioned talking with some of our larger store managers that have been around a long time, some of the customers coming back that have been out and tried that would be a piece of that. And as we've also talked about, I think we are doing a better job with the inventory. There's not a dramatic difference, but, for the same money, we are seeing a little bit lesser miles. I think we are doing a better job on that front.

And also in just our sales and marketing, we had a little bit more sophistication this year, a little bit more digital marketing. We are, really for about the past six to eight months, beginning to see our hits on that go up. So I think these things combined, and like Jeff said earlier, just the basic blocking and tackling, just trying to do a better job with customer service at the local level.

And last year's second quarter was not a great quarter at the top line, so we had a pretty easy comp there, so we think we've got some more room to grow in a healthy way on the top line.

Got it. And has there been any change in your credit scoring in terms of how you are issuing approvals or denials for loans?

It's been pretty steady. Our information shows us where we are at in a little better deals to better customers. We know the quality of that inventory is going up too, so it hasn't really shown in a big way in our loss numbers yet, but that takes a while. So we are optimistic, but the initial information that we've gotten and what we are tracking, we certainly are optimistic that we will see some steady results going forward.

Okay. And switching to collections, three months ago, you guys had noted that the first fiscal quarter ended on a Sunday, which was part of the reason for relatively high 30 days past due, but also it impacted your collection rate, which it seemed like you would've gotten that back in the second quarter. So, would you say collection rates in the quarter were maybe a little bit less than you were expecting at the beginning of the quarter?

I think that's a fair statement. A big piece of that is just due to that term length being out. We did have a few more delinquent accounts and we did more modifications, and we had a few other little things that affected that. That interest rate increase certainly has an effect on how much is principal versus interest on collections. And then we did have a trade-off from a Saturday to a Monday on the days of the week during the quarter. So -- but most of that was related to that longer term.

Got it. And with the increase in the 30 days past due to 4.8%, is that something we should maybe be a little bit concerned with?

That's definitely something we are a little bit concerned with. We are staying on top of it. I do think that we are working extra hard, as I mentioned, better customer service. We are actually -- Jeff had mentioned modifications up a little bit. So, we're definitely working harder keeping our customers in their vehicles.

But I would say that we did end October of 2015 with a really low 30-plus number. If you look back historically, we are generally a little higher than that. So part of that is due to the comp being to a pretty low quarter last year, but it is higher than we'd like to see and we are certainly focused on that.

Got it, okay. Thanks guys.

Mike Del Grosso, Jefferies.

Good morning. Thanks for taking my question. I guess the first question is can we get a little more granularity on the strong same-store sales increase this quarter? Was that more influenced by your newer stores, or the older more legacy stores, I suppose?

It was pretty much across the board, especially strong at the older dealerships. Those dealerships 10 years old or older had nice improvement in the top line, and we've been expecting that for a while. It's nice to see that come through.

Got it. And then I guess switching more to underwriting, can you comment on the down payment trends that we've seen I guess over the last two quarters? And more specifically, can you clarify what you mean by the improvement in special payments on the front end?

Yes. We would certainly love to get more money up front, always pushing for higher down payments. We're fighting competition on that side of things and trying not to lose any good customers. But if someone doesn't have as much down as we'd like or they'd like, then we do try to help increase that front equity with some special payments early in term. We've had good success scheduling those and keeping customers with good equity positions. And the reduced down payments have been a little more than offset with some special payments on the front part of the contract, so we are having some good success there. But we certainly -- and in a perfect world, we would like to see more down.

Understood. Thank you.

(Operator Instructions). Brian Hollenden, Sidoti.

Good morning and thanks for taking my call. How much of the gross margin improvement was due to inventory efficiency versus lower repair costs, and how much more room is there to improve gross margin?

It's kind of hard to separate efficiencies from just repair costs. They kind of work together. If you're carrying more cars, especially wholesale cars, you've get some additional expenses that just relate to the increased number of cars. But we've been very pleased with the efforts on the repair side, really pushing hard in that area, and we expect to continue to see good results there. We work very hard for those gross margins, and our folks are working really hard to minimize repair expenses. And the repairs that we do have to do, we are working hard on getting good parts, rates and labor rates, and we are optimistic that we can keep that going.

Okay. And then on the provisions, improved significantly year-over-year. Do you think the rate of improvement is sustainable?

We did have a reserve increase during last year's second quarter. So, when you take that out, we are basically fairly flat between quarters. Year-to-date, we are down, six months we're down, but, for the quarter, we're basically flat with last year. And we do expect, as we look forward, we do expect some improvements. When we look back, we are expecting some improvements. The last six months of this year may be a little better than what we saw the last six months of last year. And a lot of that is going to depend on what happens during tax time, especially with some crazy competitive offerings that have been happening the last few years. We are hopeful that it will get better and we will have a little less crazy offerings out there during tax time. So, we are expecting better credit results for the remainder of this year.

Thank you. And then just maybe a follow-up on the same-store sales. In your view, how much of the sales increase was related to the extension of contract terms? Is that a big factor driving the sales?

No, it wasn't the biggest, but it certainly -- there's probably a handful of customers in there that we were able to retain, particularly some of our better repeat customers that may have had some other options. We tend to get a little more aggressive with some of those folks on our higher-end cars, but I don't think that was one of the bigger factors for it.

And the term increase, it's pretty much in alignment with the selling price increase. So, the payment from a customer's perspective is about the same as it was.

Okay, great. And one last question if I can. What's the potential timing for any new dealerships being added? I know that you alluded to it in the press release, but any more color around that?

Not as far as a specific time frame to give you today. Hopefully, in the near future, we will have a little bit -- we will be a little closer to telling you what that time frame might be. But I think we've opened like 23 stores in the past three years. That, along with some turnover, we have a good number of folks we just need to work with. And we've been through a good growth time for the past many years. It's time to shore this up a little better. But hopefully it won't be too far off, but we are not really prepared to give you a time frame yet today.

All right. Thank you.

(Operator Instructions). I'm seeing no other questioners in the queue at this time, so I'd like to turn the call back over to management for closing comments.

All right. Thank you all very much for being with us this morning. Again, I feel like we are making progress in pretty much all areas of our business, need to do a little better on our credit losses. And as Jeff just told you, that is our plan, and we expect to see better results in that area as well going forward. So we will get back to work. Thank you all and have a great day.

Ladies and gentlemen, thank you again for your participation in today's conference call. This now concludes the program and you may all disconnect at this time. Everyone have a great weekend.