America's CAR-MART Inc (CRMT) 2017 Q3 法說會逐字稿

Good morning, everyone. Thank you for holding, and welcome to America's Car-Mart's third-quarter 2017 conference call. The topic of this call will be the earnings and operating results for the Company's fiscal third-quarter 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. And now I would like to turn the call over to Company's Chief Executive Officer, Hank Henderson.

Good morning, everyone. Thank you all for joining us. As you saw in our press release, our top line was up somewhat, 1% for the quarter over the same quarter last year. On a unit basis, while we were actually down slightly overall from 11,013 to 10,866, we were up just a little bit on a per store basis from 25 to 25.3 due to the closing of 4 stores in the fourth quarter of 2016. While this is an increase in the top line we were still a little disappointed as we had been making better gains thus far through the year. For the nine months, we were at 27.2 units sold per store versus 26.4 for the same period last year, 34,990 in total over 34,138.

There was a significant delay in the income tax refunds this year, actually close to a full month behind compared to last year, so there wasn't a pickup in sales in the latter part of January from those customers that had already gotten their refunds in hand, as we typically see. This obviously had an effect on not being where we would like to have been. We have recently been informed, however, that after this long delay, the first wave of checks will actually be in customers' hands this week. We are well stocked on inventory so we should be able to make up part of that.

Throughout the year, we have leaned up and realized some good improvement on SG&A and also improved on our gross margin, as well, through more effective management of our repair expenses. Jeff will give you the detail on all this in just a moment.

The area where we did not see improvement, however, was in credit losses. Net charge-offs for the quarter were 7.8% versus 6.6% last year. So, while we are in better shape on the nine-month comparison, we are disappointed in the direction we took for the quarter.

We did, however, in the quarter get in a little better shape on our 30-plus day delinquencies than last, so we are in a position to show some improvement here in this area going forward. I will go ahead and turn it over to Jeff now to give you more detail on our recent results and then come back with a few final comments.

Thank you, Hank. As Hank mentioned, total revenues increased 1% to $139 million. Same-store revenue is up 1.1%. Excluding the effect of the four dealerships we closed during the fourth quarter of 2016, and three additional dealerships that we recently decided to wind down and close, total revenues was up to 2.4% and same-store revenues was up 1.7%. The three dealerships were Nicholasville, Kentucky, Discount Auto in North Little Rock, and Albany, Georgia.

Revenue from stores in the 10-year-plus category was up 1.6%, stores in the 5- to 10-year category was down about 7% to $17 million, and revenues for stores in the less than 5-year age category was up about 8% to $29 million. The overall average retail units sold per month per dealership for the quarter was 25.3. That's up from 25 from the third quarter of last year, and down from 28.4 sequentially.

As mentioned, our productivity would have been better but the overall market has been a little soft. We actually had good traffic during the quarter but the quality of the traffic was off a little bit, and thus productivity suffered just a bit. And the delay with income tax refunds certainly hurt us at the end of the quarter. But we have some initiatives underway that will help us going forward on the revenue side.

At quarter end, 36, or 26% of our dealerships, were zero to 5 years of age; 21%, or 15%, were in the 5- to 10-year-old category; and the remaining 83 dealerships were 10 years old or older. Our 10-year-plus lots produced 27.9 units sold per month per lot for the quarter compared to 27.5 for the prior-year quarter and 30.8 for the second quarter. Our lots in the 5- to 10-year category produced 22.5 compared to 24.2 for the prior-year quarter. And lots less than 5 years in age had productivity of 22.2 compared to 21.6 for the third quarter of last year.

Our older, more established dealerships are in good position to take advantage of market opportunities for increased volumes. As we have said, the overall market has been a little hard to read, and tax time delays will push some sales into the fourth quarter this year.

Our average selling price increased 0.3% or $30 to $10,629 compared to the prior year, and increased $138 or about 1% sequentially. The flattening out of our sales price has been expected and we're working hard to find higher-quality vehicles for lower prices in this market to maintain affordability for our customers.

We currently anticipate some overall sales price increases for the near term as the demand for the cars we buy is high, especially trucks and SUVs. But we are hopeful that prices will continue to soften compared to prior year's and that we'll be in a position to put our customers in better cars for less money.

Our down payment percentage was 4.3% compared to 5.3% for the prior year. The decrease was offset some by improvements in special payments on the front end of the contracts. Collections as a percentage of average finance receivables was 12.4% compared to 12.9%. Our average initial contract term was 29.4 months compared to 29.3 for the prior-year quarter, and up slightly from the second quarter's 29.1.

Our weighted average contract term for the entire portfolio including modifications was 31.9 months which was up from 30.9 at this time last year and basically flat sequentially. Weighted average age of the portfolio was 8.9 months. That's up from 8.6 at this time last year and up from 8.5 months sequentially.

Due to the slightly increasing ASP and for competitive reasons, our average term lengths may continue to increase some into the future, but we remain committed to minimizing any increases. If competitive offerings get more conservative, we will have room to keep terms down. 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 $1.8 million compared to the prior-year quarter due to the $37.8 million increase in average finance receivables -- that was about 75% of the increase -- and to our increase in the interest rate for our contracts to 16.5% from 15%, which began in May of this year. That was about 25% of the increase. We are about one-third of the way to having all of our contracts up at that higher rate at this point.

The average interest rate for all finance receivables at the end of the quarter was approximately 15.7%. That's up from 14.9% at this time last year.

For the third quarter, our gross profit margin percentage was 40.8% of sales. That's up from 40.3% for the prior year and down just a little sequentially due mostly to the retail sales volumes being lower. We're pleased with our continuing efforts to improve the quality of our inventory and improve inventory turns and efficiencies. And these efforts are having a positive effect and will continue to benefit us as we move forward.

We have been very aggressive with inventory quality, repair costs, inventory turns and sale inventory, and our efforts are certainly showing up with the improved gross profit results. We will keep pushing for improvements with inventory management and we'll 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 highest level in this area of the business.

For the quarter, SG&A as a percentage of sales was 18.7% compared to 19.4% for the prior-year quarter. Overall SG&A dollars were down by about $900,000. We believe that we have a very lean but effective cost structure and we will continue to focus on cost controls as we move forward. We're very proud of our associates and their dedication in helping us keep our costs down.

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. We will continue to increase our investments in our GM recruitment and advancement program, our collections efforts, and in our sales and marketing efforts, as we have significant room for improvement in these critical areas and have fallen just a little behind in the last few years.

For the current quarter, net charge-offs as a percentage of average finance receivables is 7.8%. That's up from 6.6% from the prior-year quarter and up from 7.7% sequentially. The increase is related to a higher frequency of losses for the quarter. Excluding the seven dealerships that are winding down or closed down charge-offs were about 7.6% for the quarter. That's still much higher than we'd like to see. We will note that net charge-offs for the full nine-month period was 21.8% compared to 22.2% for the prior year.

Our wholesale value recovery rates continue to come under significant pressure, but that has leveled off the last few quarters and we are hopeful that we bottomed out with recovery rates. Our recovery rates for the quarter were again in the 22% to 23% range, which is historically low.

Principal collections as a percentage of average finance receivables for the quarter was 12.4% compared to 12.9%. The decrease resulted mostly to the longer average term, higher levels of contract modifications, a lower level of early payoffs, which most likely related to the income tax refund delay, and the increase in our contract interest rate offset by slightly lower delinquency rates. The lower collections percentage resulted in almost a 50 basis point increase in the provision for credit losses on the income statement as we reserve at 25% of uncollected receivables.

The credit loss percentage on the income statement would have been right at 30% had collections been a little higher but were short due to tax time, if we'd sold a few hundred more cars, again somewhat related to tax time, and excluding the seven dealerships that are being closed. Delinquencies are slightly lower at this point than they were last year. And we continue to believe that we are selling a higher-quality vehicle, slight improvement with age and mileage to a better credit risk customer.

Again, lot traffic was up but the closure rate was down some. That's just due to the quality of the traffic we are seeing. As discussed earlier, we have seen great execution improvement with our inventory management. And we do expect to move the needle in a positive direction with similar efforts and increased investments in collections and in our sales and marketing efforts. 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.

At the end of January our total debt was $190 million and we had almost $80 million in additional availability under our revolving credit facilities. Our current debt to equity ratio is 49.6% and our debt to finance receivables ratio is 25%. That's down from 27.6% at this time last year. We have a lot of room to grow and there is a big demand for our offering.

While we are certainly disappointed with our GAAP earnings and know that we can do much better, in efforts to improve results with existing dealerships, our intense focus on our cash-on-cash returns has allowed us in the last 12 months to grow receivables by $32 million, repurchase $12 million of our own common stock, fund $1.7 million in net capital expenditures, all while actually paying down debt by $3.7 million.

We will get collections right, we will get sales right, and we will attract and retain quality individuals to manage our dealerships, and we will grow the business in a healthy manner into the future. It will take a little time but we are determined to make it happen.

It is important to note that over the last several years our GAAP numbers have naturally moved to more of a cash basis due to the higher loan-loss reserve percentage, the increase in term lengths, the deferral of revenue with our two add-on products, and with the increase in our interest rates on our contracts. Our cash-on-cash returns have remained very strong. I will now turn it back over to Hank.

All right, thanks, Jeff. Our mission and focus going forward is very clear, and that is to work to improve customer service at every level and, likewise, our relationships with our customers. With our local face-to-face presence combined with the strong value and many years of experience, we are in a better position than anyone to work with our customers through the challenges and earn the repeat business. We have recently identified some specific areas of opportunity to deliver better customer service, and we're working to make the necessary improvements and corrections in this area, and are confident that taking better care of our customers will ultimately be reflected in our results.

As was mentioned in the press release, we are working with an outside firm to help get us more up-to-date and efficient in our marketing and communications to have a more cohesive strategy in delivering our message. This was needed and we are extremely excited about the impact this will have. However, we are acutely aware that there is no advertising or any marketing that is any substitute for or as powerful as word-of-mouth reputation we earn in each of the communities we are in by delivering excellent customer service and developing good long-term relationships with our customers. That is what got us here and that is what will assure our continued growth into the future.

We are pleased with some positive things we're seeing with our initiatives to improve the development and support of our new and future general managers. Our intent is to continue to grow on our strengths here to create internal pressure to grow to ensure that when we begin to open new stores in the future, which is our plan, that we will be doing so in a healthy fashion.

We are very excited about both the near-term and long-term future of our Company. And as we pointed out that, while not on every front have we realized the level of improvement we would ideally like to have made so far this year, we have seen improvement, nonetheless. So, that means we are headed in the right direction with each area of our business. We've got a great team here that's committed to staying on point in every category to ensure we will continue to build on the positive direction we've seen thus far.

That concludes our prepared remarks and we would now like to move on to your questions. Operator?

(Operator Instructions)

Elizabeth Suzuki, Bank of America.

You mentioned that you think the third quarter comps were affected by a delay of tax refunds. I'm just curious, what percentage of your customers in the third quarter typically use their tax refund to purchase a vehicle? And how did that percentage change in this quarter? And do you think there would be a small year-over-year boost in the fourth quarter based on that timing difference?

It's a little hard to tell. Last year the tax money was out basically for the last week of January. So, we feel like, looking back, that we had maybe 300 sales last year that did not happen this year because of the timing of tax refunds.

And, yes, theoretically that should all roll into the fourth, but the money has been delayed a full month. We are just now receiving it. There is some risk that it may be a little lower this year. But our expectations at this point are that any shortfall in the first quarter, if we execute the way we are planning to, should roll into the fourth quarter with the volumes.

Great. That's really helpful. What are you seeing at auction, both for the inventory you acquire to retail and what you send to auction for just the pricing that you're getting for those salvaged vehicles versus what you are buying at inventory? Is there a big discrepancy in used vehicle pricing for different classes or different ages of used vehicles?

Of course, the trucks and the SUVs are really high on the pricing, so that's been a challenge. And then the cars at the low end, especially when they have to be repossessed, are not carrying much value at all. So, we do have a situation where we are having to pay up on the buy side, especially with trucks and SUVs. And then when we do have to take one back or repossess one or get a trade-in, it's not worth much at auction in the wholesale market. That dynamic has been going on a while and continues today.

We did not see a spike this year during income tax time. We normally see a big spike in purchase prices for all cars, especially trucks during the fall months and on into the early spring months. We have not seen a big jump this year like we have in the past. So, we are optimistic that looking forward we're going to be able to buy a better car for less money.

Great. And I'm just going to throw in one more, which is, your provisions for credit losses were up almost 15% year over year, yet your total sales were actually down slightly. Can you talk about why the provisioning keeps accelerating and what you would need to see in terms of certain benchmarks of either collection rates or percent of accounts past due or other metrics that would make you feel more comfortable with the lower provision rate?

As I mentioned in my commentary, the GAAP numbers and the cash numbers are getting a little closer. The longer our terms are for our average contracts, the more contracts we have outstanding. And any time you have a quarter or a period of time where you're top line has flattened out, when you have more contracts out there that could go bad, then sometimes on a quarterly basis or a short period of time, it will cause credit losses, charge-offs, and net income statement provision to be higher.

That's just the mechanics or the math behind having a larger portfolio stretched over a larger period of time measured against one quarter of sales. And we did have a flattening of the sales side. When you look at the cash-on-cash returns over the entire life of the contracts, we're still doing very well. But with that measurement, it's just sometimes on a quarterly basis, especially when the top line is flat, that it will give you a higher result on the credit loss line.

Great. Thanks. That's very helpful.

John Rowan, Janney.

Good morning, guys. Hank, in your prepared remarks you said something about credit getting better going forward. I just want to make sure I understand that. Are we talking about the actual net charge-off rate coming down or the rate of deterioration year over year slowing? Just help pars out that comment with what we should expect going forward.

Yes, I think that was in reference to the fact that our delinquencies year over year were a little bit lower than they were the same time a year ago. So, based on that fact, I think it's reasonable to assume that in the near term on a year-over-year basis we should be in better shape than we were at this time.

I also think we are working through -- we've talked a lot about the competition, and right now how so many of their customers have had deals pushed at them, that I think we are cycling through that, that ought to begin to flatten out and normalize somewhat, I think. I do think that we've recognized some opportunities here. And just the improvements we've seen thus far, we ought to see a little bit lower losses going forward than where we were. That's our intent.

Okay. And then, as you know, two of your peers recently got CIDs from the FTC for information on the GPS units. Can you just give us an idea of what your policies are for using GPS units for beeping when a customer is late, or remote dislocation? And then just also another question on the same topic, my understanding is that a lot of these cars that come back actually have a lot of GPS units in them. It's not like one lender puts a GPS unit in and then takes it out. Can you give us an idea, are there a lot of GPS units in these cars? And, if so, are they still active or are they disabled? Can you frame out your policies around that?

We only use the GPS products for location only and only when the customer is not contacting us and we can't reach them by standard methods, is when we use the product. It is not used for any kind of starter interrupter or any pinging or anything like that, noisemaker, or anything to that effect. It's simply used for locating the collateral when the customer is not communicating with us.

As for your question if there are other devices in there, I really haven't heard a whole lot of that, so I don't think we could really speak to that.

I spoke to someone two days ago who said when they went in to take the GPS unit out, there were six units in there. It had been repo'd a bunch of times before, which is fine. I was just curious.

And then I was a little surprised to see the share count actually move up on a sequential basis. What are your plans for share repurchases? And did you repurchase anything in the quarter?

We did not repurchase during the quarter. We are always out there opportunistically and the increase just related to some stock option exercises.

All right. Thank you.

John Hecht, Jefferies.

Good morning, guys. Thanks for taking my questions. The first on gross margins, I do see they have improved year over year for a few quarters but there was a downtick from the second quarter to the third fiscal quarter. I'm wondering, is there seasonality, is there seasonal elements to that gross margin? I'm just trying to think of this in the context of what we might expect for the fourth quarter.

Yes, there is a little seasonality. More than anything, for the current quarter the top line was a little short of where we thought it would be. Had we had a few more retail sales in there, that would have been at or above last year's numbers. It was more affected by just the shortfall at the top line on what we were expecting.

And in the fourth quarter, historically there have been more wholesale transactions rolling through the fourth quarter. So, that's a natural drag on gross margins for that fourth quarter. Plus the selling prices for cars after tax refunds are received, the selling prices are a little higher during that fourth quarter, which brings the margin percentage down. Our inventory is so much cleaner this year compared to last that we don't expect to have as big a drag in the fourth quarter on the wholesale side.

Okay. That's helpful. Thanks. And, second, I know you guys talked about pretty intensively competitive environment with the indirect lenders and so forth. I'm wondering, number one, are you seeing any change in patterns there? Is there anybody rationalizing or pulling back at this point? Or is it still all full bore?

And then, second, what are the other Buy Here/Pay Here operators doing? Do see them under duress? And does that give you guys more opportunity once the competitive environment rationalizes?

To that latter question, I don't think there's much question that if things truly normalize back to where we feel like they ought to be from several years back, yes, I think there will be less competition on the other side of that. They've got to feel the same pressure that we have. And I would suspect that during this time, there have been some exit to market or remodel their business to where they've been using some of the indirect lenders. We definitely expect on the other side there's some benefit to the competitive market.

But right now, we have not heard a lot about pulling back. We have heard some indications of a little tightening. I don't think we have had quite the drop off, that sort of thing, as we have talked about in the past couple years; albeit, we are at, as we mentioned, folks really hadn't got their refunds in hand. In the past few years we've seen some of those drop-offs where they've gone to the others. But I think at this point time they've already been pushed so many deals that we don't anticipate seeing that quite at the levels that we have before. But I wouldn't tell you there's been a dramatic change in the competitive side.

Our traffic, it may be a slight indication but our traffic was actually up a little bit. The quality of that traffic was a little spotty, but the traffic was up. It just seems like going into several years of excess lending and excess offerings to our customers, it just seems like there's a little fatigue out there with the consumer at this point. Our goal is to get better traffic from better consumers and increase that closure rate. And we think we've got some room there.

Okay. That's helpful. And then last question -- forgive me if you addressed this -- I know you mentioned you shut down seven branches. Going forward, any other branches you're targeting to shut down, number one? And, number two, what's a good pace of branch openings we should anticipate for the next couple years?

As far as the opening side, we haven't spoken to that yet so we're going to hold off on that. And, as we mentioned, we are seeing some good indications on some of our additional training that we are doing here. But I don't think we are really prepared to talk about our openings quite yet. And as far as the closures, we haven't announced any additional over what Jeff listed earlier but we will continue to evaluate and see where we are on that.

We feel like that with the 140 dealerships that we have now, we've got a lot of room to increase profits and increase the top line from that existing store base over the short term.

Okay. Great. Thanks, guys.

Brian Hollenden, Sidoti.

Good morning and thanks for taking my questions. With demand softening, would you anticipate average contract terms to continue to increase or could that contract some?

It's hard to -- it's going to depend on what the competitive offerings are out there. We don't like to go any longer than we absolutely have to, to keep our consumers in a position to get those contracts paid off. But a lot of that's going to be outside of our control.

Okay. And then what can be done on the collections side to reduce charge-offs?

I think there's several things we've got going on internally. As mentioned, it's some good old-fashioned hard work and better effective training on customer service. We have recognized some areas where we can improve there. It is internal, more on the training side, I would say.

Okay. Thank you. And just a final follow up, can you quantify the total margin improvement opportunity? Can the gross margin get back toward a 42% level based on improvements in inventory management?

Yes, we feel like it could. As the sales price increases, that margin percentage is a little less. But we do feel like we still have some room to make some additional improvements with inventory management and expense management. So, we are expecting solid gross margin percentages going forward. Now, whether it gets to 42% or not is a little hard to say, but we feel like we are in a good spot and we have some more room for improvements.

Thank you.

(Operator Instructions)

I am showing no further questions at this time. That will conclude today's Q&A session. I would now like to turn the call back over to Mr. Hank Henderson for any closing remarks.

Again, we thank everyone for joining us this morning. As we mentioned, the refund checks are hitting this week so we are about to go into what could be our couple of busiest weeks of the whole year. Our intent is to get back to work and come back to you guys with some better results. Thank you all and have a great day.

Thank you.

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