America's CAR-MART Inc (CRMT) 2018 Q1 法說會逐字稿

Good morning, everyone.

Thank you for holding, and welcome to America's Car-Mart's First Quarter 2018 Conference Call.

The topic of this call will be the earnings and operating results for the company's fiscal first quarter 2018.

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 the call this morning are Hank Henderson, the company's Chief Executive Officer; and Jeff Williams, President.

And now I'd like to turn the call over to the company's Chief Executive Officer, Hank Henderson.

Good morning, and thank you all for joining us.

We are pleased to report an increase of earnings per share for first quarter this year, earning $0.90 per share, up from $0.87 for the same time last year.

We had an increased sales productivity on a per store basis going to 28.2, up from 27.9 last year, which is a solid improvement.

And there is still room for much more improvement with this number as we have many stores with capacity for more sales.

And our intent is to continue to grow those in a solid, manageable fashion.

The couple of clicks up on average sales per store, a quite significant improvement in the bottom line as long as we do so while not sacrificing quality.

While we didn't see an increase in the overall unit volumes as we were working with a slightly lower store count -- it was 140 this year versus 143 same time last year -- the improved per store number is a very positive move, and we feel confident that the overall quality of our underwriting and the inventory is better this year than last.

We've made improvements to our underwriting system throughout the year, and we've also seen solid improvements in our inventory purchasing in this first quarter.

And for the same money, we've been able to lower average age of the vehicle we're putting on the road by over a year, and we've also slightly lowered the average mileage.

Better underwriting and better inventory, obviously, sets us up for better returns, but to be realized, it also must be supported by very ongoing customer service, and that is our focus.

So I'm going to go ahead and turn it over to Jeff to give you the details on the recent results, and then I will come back to you with a few final comments regarding our upcoming transition that was mentioned in the press release.

Okay.

Thank you, Hank.

For the quarter, same-store revenues was up 2.1%.

The 0.4% overall increase in revenues resulted from a 12.3% increase in interest income and a 1.1% decrease in sales, which related to the effect of the 8 dealerships that have been or are being closed.

Revenues from stores in the 10-plus-year category was up just slightly, 0.2%.

Stores in the 5- to 10-year category was up 4% to about $25 million.

And revenues for stores in the less than 5-year of age category was up about 7% to $26 million.

It was nice to see the overall revenue increase and to see many of our older dealerships show improvement.

We will continue to push several initiatives, including inventory improvements which are under way that we believe will help us going forward on the revenue side.

We will also continue to improve our lot-level sales execution, including training and support and efforts related to prospecting, all in an effort to increase quality, lot traffic and closure rates for better customers at our dealerships.

At the end of the quarter, 32 or 23% of our dealerships were from 0 to 5 years old, 26 or 19% were from 5 to 10 years old and the remaining 82 dealerships were 10 years old or older.

Our 10-year-plus lots produced 30.5 units sold per month per lot for the quarter compared to 30.6 for the prior year quarter.

Our lots in the 5- to 10-year category produced 26.6 compared to 25.7, and the lots in the less than 5-year-age bucket had productivity of 23.5 compared to 22.3 for the first quarter of last year.

Our average selling price decreased just slightly to $10,386, 0.1%, or about $7 compared to the prior year and decreased $268 or 2.5% sequentially, which is common for our first quarters.

The flattening out of our sales prices has been expected, and we currently anticipate flat to some minor increasing overall sales prices for the near term as the demand for our cars that we buy is still high, especially for trucks and SUVs.

But we're hopeful that prices will continue to soften compared to prior years and that we will be in a position to continue to put our customers in better cars for the same money.

As we've said repeatedly, decreasing car prices is actually a good thing for us and does not necessarily mean that our overall sales prices go down.

Our down-payment percentage was 6.2%.

That's up from 6% for the prior year.

Collections as a percentage of average financial receivables was 12.4% compared to 13% last year.

Our average initial contract term was 29.8 months compared to 29.3 for the prior year quarter, and it was down from 30.07 for the fourth quarter.

Our weighted average contract term for the entire portfolio, including modifications, was 32.6 months, which is up from 31.7 at this time last year, and basically, it was flat sequentially.

The weighted average age of the portfolio was up to 8.9 months.

That compares to 8.4 months at this time last year.

For competitive reasons, specifically for those customers that have more choices, our term lengths may continue to increase some into the future, but we remain committed to minimizing any term increases.

We must always focus on affordability, and better customers can and do demand lower, more affordable payments, so it's always a balance for us.

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 to improve their success rates.

Interest income was up $2 million compared to the prior year quarter due to the $27.3 million increase in average finance receivables.

That was about half the increase.

And the other half related to the fact that the interest rate on our contracts is now 16.5%, up from 15% prior to May of 2016.

The weighted average interest rates for all finance receivables at the end of the quarter was right at 16%, and that's up from 15.2% at this time last year.

For the quarter, our gross profit margin percentage was 41.4% of sales.

That's down just a little bit from 41.8% for the prior year, and it was basically flat sequentially.

The decrease resulted mainly from higher claims under our Payment Protection Plan product.

We are 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 will remain aggressive with our inventory management, but we will ensure that we have a good selection of quality cars, trucks and SUVs at our dealerships to attract our target customer.

For the quarter, SG&A as a percentage of sales was 18.6% compared to 17.9%.

Overall SG&A dollars were up by $697,000 for the quarter.

As we've discussed, we continue to make additional investments in the General Manager Recruitment, Training and Advancement areas, Collections Support, marketing, and our increased SG&A relates primarily to these areas.

Our plan is to leverage these investments over time as we grow.

We will always watch our costs and be very frugal, but we will also ensure that we have an infrastructure in place to support our valued customers at the highest level.

This is a high-touch business.

For the quarter, net charge-offs as a percentage of average finance receivables was 6.4%.

That's up from 6.2% for the prior year quarter, but it's down from 8.7% sequentially due to seasonality.

The increase resulted from a higher severity of losses as our frequency losses was flat.

Excluding the 8 dealerships that are closed or winding down, net charge-offs as a percentage of finance receivables would have been 6.2% for the current quarter, which is flat from the prior year.

Remember that we did come into the quarter with a 3.6%, 30 plus this year, and last year, we came into the first quarter with a 3%, 30-plus number.

So the fact that we ended up flat is a testament to the progress we're making on the collections side.

So we're very pleased with that.

Our wholesale value recovery rates continue to come under pressure, but they've leveled off in the last few quarters.

Recovery rates for the quarter were again in that 22% to 23% range with basic cars continuing to drag down those percentages.

Principal collections as a percentage of finance receivables for the quarter was 12.4% compared to 13%.

The decrease related mostly to the average term being a little longer, but also, it related a little bit to higher levels of contract modifications as we work with customers individually, a lower level of early payoffs and the increase in our contract interest rate offset by a higher average age of our receivables.

The lower collections percentage resulted in about a 50 basis point increase in the provision for credit losses on the income statement as we reserve 25% of uncollected AR.

Between the effect of the closed dealerships and the lower collection percentage for the reasons mentioned above, credit losses would have been about 70 basis points lower or about 26% for the quarter.

We continue to believe that we're selling a higher-quality vehicle, as Hank mentioned improvements with age and mileage, to a better credit-risk customer.

We believe that our customer service levels are continuing to improve, and we combined with us providing our customers affordable, dependable vehicles, we expect losses to trend downward over time.

At the end of July, our total debt was $118 million, and we had almost $79 million in additional availability under our revolving credit facilities.

Our current debt-to-equity ratio is 49.5%, and our debt to finance receivables ratio is 24.3%.

We have significant room to grow, and there is a high demand for what we offer, especially as we continue to improve our customer relationships in the field.

We know we can improve consistency and results with the existing dealerships, and we are recruiting, training and supporting our future general managers at a much higher level to allow us to grow our bench of talented associates to some day get the keys to their own dealerships.

Our intense focus on cash-on-cash returns allowed us to grow receivables by almost $17 million and repurchase $3.7 million of our stock while actually paying down debt during the quarter.

We have now repurchased right at 42% of our company for about $160 million since 2010 at an average price of about $32.

It's a very exciting time for Car-Mart, and our plan is to grow the business in a healthy, efficient manner and continue to repurchase shares opportunistically.

Now I'll turn it back over to Hank.

All right.

Thanks, Jeff.

Well as you saw in the press release, effective at the end of this calendar year, I will be stepping aside as CEO, and Jeff Williams will be taking on the role.

I've been with the company for over 30 years now, serving as CEO for the past 10 years and as President and COO for many years prior to that and even other various capacities for that as well.

It has been an incredible, fantastic experience to have been part of such a great team of people to help build and grow this company into what it is today.

And I feel truly blessed to have had this opportunity.

I owe a tremendous amount of gratitude to the hardworking, dedicated people of such high character that I've been so very fortunate to work with throughout this time.

We've been through some great times, and we've been through some very challenging times together.

And all along the way, they fought hard to preserve our company culture, and I cannot even begin to ever thank them all enough for their tireless efforts.

Also, although they are no longer with us, I would be remiss if I did not include mentioning that I'm also very grateful to our Founder, Bill Fleeman, and Nan Smith for establishing the foundation of such a strong culture and for putting such great trust and confidence in a young man many years ago.

Now going forward, I will still be around to give Jeff and senior management my full support in any and every way I can to help assure we continue to move upward and onward.

We got a lot of great things happening here and now, and I am fully committed to doing my part to keep that momentum going.

That does conclude our prepared remarks, so we would like to move on now to your questions.

Operator?

(Operator Instructions) I would like to reiterate that my earlier comments regarding forward-looking statements apply to both the participants' prepared remarks and to anything that may come up during the Q&A.

(Operator Instructions) Our first question comes from the line of John Rowan with Janney.

Jeff, congratulations, and Hank, good luck.

Thank you.

Thank you.

Sorry, a couple of actually pretty quick questions.

Jeff, I think you were -- I wasn't sure if you were talking about just loan modifications, but you mentioned something about reserving a 25% of AR.

But it looks a little bit lower than the allowance ratio -- probably a little higher rather than the allowance ratio right now.

Is there a reason why -- well, would the overall allowance ratio move up to 25% or kind of stay where it is based on the comments that you made?

It would stay where it's at.

The comment was just to say that anytime your collections are a little less as a percentage, your income statement provision is going to be a little higher, just for those uncollected dollars.

But 25% is what it's been for a while, and it's where we expect it to be going forward.

Okay.

I was glad to see the productivity come up on a per month basis per store.

Is there any read-through there as far as what's happening on the competitive front?

I mean, obviously, we are starting to see a little bit of weakness in subprime consumer credit availability.

Any comments you'd like to make on that?

I think there's a few things.

I think there is a little bit of tightening out there.

I think, also, just -- and talking with their managers, I think we've mentioned this the last time we all spoke.

We're seeing some customers kind of [tackle] back.

They've been over there and tried the other side, and now they're back.

And I do think that, that wasn't -- or actually, our sales from repeat customers is maybe at an all-time high.

It's very high during this first quarter.

And then also, I think we're getting a little -- as we mentioned, doing a little better job with our inventory.

We're seeing some improvements there.

And so I think all those things combined help push up the store productivity.

And then kind of go back to the inventory.

Obviously, you talked a lot about car prices coming down, and that helping you provide a better car to the consumer at the same price.

Can you maybe help us understand how much of a better car you're providing, whether it's 10,000 or 20,000 miles less on the odometer or 1 or 2 model years newer?

Just kind of help us frame out what type of difference a consumer was seeing in the inventory and the car for the same price when they walk in the dealership.

Yes.

As far as just those stats you mentioned, the mileage is only slightly less.

It's not as significant as the numbers you mentioned.

It's just a few thousand miles under, comparatively, quarter-to-quarter.

But it's probably one of the biggest improvements we've ever seen in the year.

We're actually comparing the same time frame last year.

We were actually a little better, a little slightly more than a year's difference.

And that is significant.

But also, along with that, just being more selective and seeing a lot out there where the market's good, just 2 cars side-by-side, same year, make and model, it can have a lot of differences.

And so I just think, overall, we're buying a better car.

One of the conversations simply we've had here, not real complicated, but going back some time, we were just asking the question how many of these need repairs and need work and trying be more selective.

And buying fewer of those that need any help, and I think we've been successful with that, and certainly, it is also showing up in some reduced repair expense, which is helping the bottom line.

And John, as credit gets a little tighter in the markets above us, the flow of product down into our market becomes much better.

We've been in a period for several years now where the flow into our markets has been stuck.

It may be the new car dealerships because that financing has been available, so as that tightens up, we get a better flow of products, and we get to start cherry-picking a little bit.

(Operator Instructions) Our next question comes from the line of Brian Hollenden with Sidoti.

The year-over-year decline in gross margin, is that due to vehicle mix or recovery value?

Can you provide a little more color on that?

Yes.

That mostly just related to some higher claims volume and cost on our Payment Protection Plan product.

With the decreasing wholesale values, one negative is when a car is wrecked, it becomes subject to being totaled a little quicker than it used to be.

So our claims experience and our losses for that add-on product had been a little higher than last year, but that's the primary reason for the slight decrease in that percentage.

Okay.

And then we saw flat retail sales prices year-over-year.

Do you know have that -- do you know how the optimal mix of trucks and SUVs?

Or should we expect prices to increase?

I think we're probably -- they're always a little short on trucks and SUVs.

So we'd love to be able to see the flow of those products come in our markets a little more easily, and that would certainly help keep that sales price up and maybe even increase.

I think we've got some room on the mix to continue to try to get more trucks and SUVs.

Okay.

And then you mentioned it in the press release.

Could you give us maybe a better outlook on the timing in terms of what you're thinking about in terms of new dealerships?

Well, we're working on getting our bench strength up, and we've got a lot of dealerships out there now that are -- have general managers that are newer in their tenure.

So we've got a little seasoning to do, and we do have so much opportunity, as Hank mentioned, to increase volumes in the existing 140 dealerships and to improve profits with what we have.

We're not going to rush these store openings because we've got so much potential with existing dealerships.

But our goal over time, we don't have a specific time, is to really get a strong bench there, and -- but we don't have specific time line on that.

Okay.

And then last one from me.

With Jeff taking over the CEO role at the end of the year, are you looking for a new CFO internally or externally?

Just what's the transition look like there?

We are in process, and we'll have some news for you guys just as soon as we can.

And I am showing no further questions at this time.

I'd like to turn the call back to Mr. Henderson for closing remarks.

All right.

Well, very good.

Thank you all for joining us this morning.

And as I mentioned, we've got a lot of really good things going here.

The attitudes are good, a lot of optimism.

So we're going to stay with that and keep the momentum, as we mentioned before, and hopefully, come back to you guys with a continued improved results.

So you guys all have a great weekend.

Thank you very much.

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 wonderful day.