America's CAR-MART Inc (CRMT) 2019 Q3 法說會逐字稿

Good morning, everyone.

Thank you for holding, and welcome to the America's Car-Mart Third Quarter 2019 Conference Call.

The topic of this call will be the earnings and operating results for the company's third quarter for fiscal 2019.

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 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 involves risk 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 obligations 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, 2018, 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 Jeff Williams, the company's President and Chief Executive Officer; and Vickie Judy, Chief Financial Officer.

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

Okay.

Thank you for joining us, and thank you for your interest in America's Car-Mart.

We had a good quarter with solid improvement in the key areas of our business.

We're happy to see our hard work and our focus on operational nonnegotiables translate into solid bottom line results.

Sales volume productivity was up, net charge-offs was down and collections improved, and we finished the quarter with a much lower 30-plus past due percentage.

Even though the results are good, we know that we have a lot of room to continue to improve.

And we're working hard to get better and serve our customers through our associates at the very highest levels.

We are restless about continuous improvement.

We believe we have an obligation to push for healthy growth as we believe communities are better when Car-Mart is there.

I'm going to go ahead and turn it over to Vickie to go over some numbers.

Vickie?

Good morning.

For the quarter, overall revenues were $161 million with same-store revenues up 8.5%.

This resulted from a 9% increase in sales and an 11.6% increase in interest income.

Revenues from stores in the over 10 years of age category was up 8%.

Stores in the 5- to 10-year category was up 8% to about $36 million.

Revenues for stores in the less than 5 years of age category was up about 30% to about $20 million.

We've continued to see increased traffic at our dealership, and we believe our focus on quality inventory has helped drive this.

Our average selling price increased to $11,146, a 4.5% increase or $484 compared to the prior year quarter.

We also saw an increase of $116, sequentially.

This increase results primarily from the increase in overall vehicle purchase costs because of the high demand for vehicles in the used car market, which in turn results in higher selling prices.

We do expect purchase cost to continue to remain elevated through tax time and our fourth quarter.

However, we will continue to stay focused on keeping the transaction affordable for our customer and to provide the best vehicle for the money.

At quarter-end, 23 or 16% of our dealerships were from 0 to 5 years old, 36 or 25% were from 5 to 10 years old and the remaining 84 were 10 years old or older.

Our overall productivity increased to 27.9 units per lot from 27.2 compared to the prior year third quarter, a 2.6% increase.

Our 10-year lots -- 10-year plus lots produced 30.3 units sold per month per lot compared to 29.1 for the prior year quarter.

Our lots in the 5- to 10-year category produced 25.6 compared to 24.7 for the prior year quarter, and the lots less than 5 years of age had productivity of 22.7 compared to 21.6 for the third quarter of last year.

Our down payment percentage was flat compared to the prior year quarter.

However, collections as a percentage of average finance receivables was up 70 basis points to 13.2% compared to 12.5% last year.

The average originating contract term was 29.4 months compared to 29.5 for the prior year quarter and up from 29.2 months sequentially.

Our weighted average contract term for the entire portfolio, including modifications, was 32 months for the third quarter compared to 32.4 for the prior year quarter.

The weighted average age of the portfolio was basically flat at approximately 9 months.

We believe our investments in collection staffing, better visibility and consistency in our collections efforts have contributed to these improvements.

Interest income was up $2.2 million compared to the prior year quarter due to the $45.5 million increase in average finance receivables for almost 90% of the increase and also due to our increase in the interest rate on our contracts to 16.5% from 15%, which began in May of '16.

The weighted average interest rate for all finance receivables at the end of the quarter was approximately 16.4%, up from 16.2% at January of '18.

Our gross profit margin remained flat at 41.5% of sales for the third quarter and down from 41.7%, sequentially.

We continue to stay focused on managing inventory and repair costs, while battling the gross margin pressure as a result of the higher average selling price as our gross margin percentages are lower at a higher selling price.

We are pleased to see the productivity improvements from some of our investments that we've made with some leveraging of the SG&A.

SG&A dollars were up $1.6 million at 18.9% as a percentage of sales compared to 19.4% for the prior year quarter.

We have added over 4,800 customers since this time last year, and we're serving more customers per full-time associate as we work to stay efficient with our operations.

We will continue to invest in our associates and our infrastructure to improve the customer experience.

One of our ongoing initiatives is to improve our website and our overall online customer experience.

For the current quarter, net charge-offs as a percentage of average finance receivables was 6.2%, down from 7.4% in the prior year third quarter.

We have continued to improve both the frequency and severity of losses compared to the prior year as we work to improve our deal structures and drive customer success.

Improved collections are 70 basis points better and higher recovery rates contributed to the decreased severity of losses.

Recovery rates for the quarter were approximately 27% compared to 25% to 26% last quarter and 22% in the prior year quarter.

Our effective income tax rate was 23.7% for the third quarter of fiscal year '19, and the prior year tax benefit resulted from a $9.7 million adjustment recorded primarily due to the enactment of the Tax Cuts and Jobs Act in December of '17.

We expect our base effective tax rate to be approximately 24% going forward prior to any excess tax benefits from stock option exercises.

At quarter-end, our total debt was $171 million, and we had over $44 million in additional availability under our revolving credit facility.

We did amend our revolving credit facility in December of '18 to extend the term to December of '21, we increased the total permitted borrowings from $200 million to $215 million and we reduced the current applicable interest rate by 10 basis points until May of '19.

Our current debt-to-equity ratio is 69.5% and our debt-to-finance receivables ratio is 31.4%.

Our interest expense increased $628,000 this quarter compared to last year's quarter due to the increase in debt, about 60% of the increase and also due to the increased interest rates.

During the quarter, we repurchased 141,500 shares or 2.1% of our company for $10.2 million at an average cost of $72.20 per share.

Since 2010, we have repurchased approximately 53% of the company for $222 million at an average price of $36 per share.

We continue to have strong cash flows.

For the 9 months, we've added $41.5 million in receivables, repurchased $24.1 million of common stock, funded $3 million in capital expenditures and increased inventory by $5.2 million, a total of $73.8 million with only $18.4 million increased in debt.

Our focus will be to continue to invest in our associates, grow the business and take advantage of market opportunities, while continuing to purchase shares opportunistically.

I'll turn it back to you now, Jeff.

Okay.

Thank you, Vickie.

Our nonnegotiables relate to: number one, facilities and associates; number two, inventory; number three, collections practices; and number four, expense management; and with our fifth nonnegotiable, customer relations and customer experience being a part of, but separate from the other 4. Our improved financial performance to this point has been mostly the result of our disciplined focus on lot level blocking and tackling, the nonnegotiables 1 through 4, where we still have a lot of work to do, but we're making solid progress.

We understand that to be a great company, our purpose has to be clear.

And in this high-touch business, the customer experience through our associates must be great always.

The service we provide is so very important to the good, hard-working customers we serve and we can have such an effect on the quality of their lives, we have a duty to be over-the-top good with all customer interactions.

Again, we believe we have room to improve on the first 4 nonnegotiables.

However, customer experience is emerging as our top priority as we strive to be a great company.

As mentioned in the press release, we have 4 new dealership openings in process and we're excited to get started in these communities.

Our plan is to grow at a healthy rate, in line with our ability to support our associates and customers at the very highest levels.

We will continue to invest in our people, especially our general managers, and we're pleased to see our investments being leveraged so quickly.

The market we serve is large, and we have a great opportunity to serve more communities in the future.

And as always, we would like to thank our associates for their hard work and dedication to this effort, and thank you again for your interest in Car-Mart.

We will now open it up for some questions.

Operator?

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

(Operator Instructions) And our first question comes from John Murphy with Bank of America Merrill Lynch.

This is Aileen Smith on for John.

First question around provision for credit losses and what were, at least relative to our estimates, significantly lower than expected and even down year-over-year.

How do we marry some of that performance with other data points that we're seeing around delinquencies potentially picking up in the subprime lending space?

Is this something where you guys have already provisioned for and feel appropriately situated?

Or is it just the credit quality of the consumers coming through your dealerships is a little bit better than you would have otherwise envisioned?

I would say that it starts -- it always starts with a better car, so I think the improvements we've made in the acquisition of good product is the starting point for better credit results.

And then on top of that, the efforts we have made with collection practices and getting resolution with past due accounts much quicker has also contributed.

It's basically -- we're doing a better job blocking and tackling internally with a better car and a slightly better customer.

So we attribute our better results to our work.

Our work product is better than it has been.

The product we're putting out is better.

We're seeing a lot of success with our collections practices and our provisioning has remained relatively flat.

We provision to a point where we keep our reserve at 25% of receivables, and we feel like the quality of our portfolio is certainly improving.

We're going to leave that provisioning at a level that keeps us at 25% of receivables reserved.

We feel pretty good about the portfolio, the delinquencies, losses in the future.

We just think that most of these improvements are the result of a better car and us doing better work after the sale on the collections side.

I might also add to that, Aileen.

I think our deal structure -- and I mean, that's part of our collection practices.

And I think our whole deal structure and the way we're modifying the accounts, we've continued to work on that area as well.

And I think that's helping in this.

Okay.

Great.

That's very helpful.

Second question, there has been reports probably over the past 2, 3 weeks and even ourselves, we've looked into it around the impact of tax refunds this year and what could be lower tax refunds for consumers potentially for not withholding correctly in terms of their paychecks.

Have you guys in the past 2, 3 weeks around tax season and refund filing seen any differences in the consumers coming in and sort of appetite for buying used vehicles, particularly if we think about tax refunds representing oftentimes a good chunk of a down payment for consumers?

Is there really any evidence to support that, at least from what you guys see yet?

Our contacts indicate that for our customer, specific to our market, refunds are expected to be up some this year.

These refundable credits are going to more than offset some withholding issues that some consumers above ours might have.

So we expect, as we look through the entire tax season, that our customers are going to be getting a net increase in tax refunds.

The timings has been a little funny.

With the refund anticipation loan starting in early January, it looks like consumers are taking those loans at a pretty good clip, but they are taking smaller amounts than maybe was expected.

So we haven't really seen a bump yet from tax refunds, and we do expect that to come and maybe be here at the last part of February and onto -- into a good portion of March.

So the government shutdown and all the noise out there has maybe put a slight damper on sales demand and the money is not out there yet, but we feel pretty confident that it's coming.

Our inventory is in good shape.

Our folks are ready to move some cars in this fourth quarter, and we feel pretty good about things.

Great.

That color's really helpful.

And last question, following up on some of the prepared remarks you made around investing in a better website.

I realized it might be early days, but do you have any sort of assessment of a payback period or return on investment in terms of dollars that you're putting into modernizing and improving the site versus what could be improved throughput at your stores as a result?

Yes.

We're very cost conscious and very frugal with our investments.

We think we've got a very good approach to improving our digital experience, including the webpage.

We were really at a point where we had to upgrade what we offered, and we're adding an online credit application process to the webpage.

We're adding pictures of cars and some other features.

It's not going to be a huge dollar investment for us, and we've been working on it for 6 or 7 months already and those costs are not being capitalized.

So it's going to be a very cost effective investment for us, and it's something that we needed to do.

We did not have a good digital presence at all, and we're going to have a good product within the next few months.

But as far as the investment, it's something that we just needed to do, especially when we look at customers shopping online and us having the ability to process credit applications online.

This is an area we needed to invest in -- that hasn't stopped our investments at the lot level either.

So our goal is to just keep investing where needed, especially in people, but we've got a lot of opportunity to grow and improve operations.

And we'll be very frugal and very direct and thoughtful with our investments.

Our next question comes from John Rowan with Janney.

So I wanted to kind of address the improvements on 2 fronts.

So obviously, a lot of your fundamental markers are improving year-over-year.

One of the things that you guys mentioned were a lot of internal forces, right, whether it's collection staffing or the different way you're working in modifying accounts.

Can you give us some specific examples within those 2 areas of what you're doing specifically to improve collection speed or whatever areas of your business are showing positive comps year-over-year?

So on the collections side, we kind of looked at our account representatives who make our collection calls.

We looked at their pay and the number that we needed per dealership.

And then we also got some better visibility into the number of calls they were making, the number of personal visits that were being made with some more follow-up at the corporate level.

And then where we saw there were some deficiencies, we followed it through with some additional training from the corporate support team.

And so we have a team for each region.

So I just think our attention and focus to the details and how we improve, and our next direction in that area will be the quality of those calls and visits.

So we still feel like we have a lot of improvement to do, but that's what we've done specifically in relation to those collections.

And we've got a really talented team that is dedicated to looking at these productivity statistics that we didn't have visibility on before and really working through operations to maximize what we're doing out there to serve those customers at a higher level, to get resolution on issues much quicker because we have the visibility, but it started with visibility.

And then we put a really good team dedicated to working through operations, on improving productivity and in the quality of the work too.

It's not just about the numbers, it's about the quality of that work and getting resolution quickly when one of our customers is having an issue.

Okay.

And then just to kind of touch base on the external factors.

Obviously, you guys are doing what you need to do on your side.

But we certainly can't ignore the fact that deep subprime issuance is down.

And I'm wondering what your take is on the current competitive environment?

I mean, we've seen several smaller players, private players go out of business.

We've had the Honor Finance, ABS deal go bad.

And we're hearing reverberations through the market whether it's higher or more restrictive structures on some ABS deals post the Honor Finance deal.

Have any of those things impacted your competitors?

I mean, you're self-funding, so you can take advantage where others might have weakness in the market.

And I'm wondering, on top of the internal improvements you've made, what, if any, external factors you're attributing to some of the success?

It may be slightly better today than it was a year ago on the competitive side.

It's a little hard for us to see that sometimes, but there's still plenty of money out there chasing our market and chasing our deals.

So there's no shortage of folks going after our customer every day, but there may be some leveling off of the competitive situation.

Maybe it's a little better than it was, but I think that we're convinced, based on our knowledge of the business and what our folks are telling us from the field, that most of these improvements are really about the nonnegotiables and the blocking and tackling and us getting better at what we do.

Our next question comes from Vincent Caintic with Stephens.

Just a quick follow-up on the tax refund questions -- season questions.

So it sounds like it hasn't really had much of an impact yet.

I guess, typically, seasonally, do you see a bigger impact, say, in March or in April?

Or when should you expect to see a lot of, say, payouts or a lot of down payment activity happen because of the tax refund season?

Yes.

So that's typically in February.

It starts in February and then it will run some into March as well.

Typically, the biggest part is February.

So -- and so there hasn't really been a change year-over-year from what you've seen so far?

Not a big change.

There had been some refund anticipation loans, but in smaller dollar amounts and not really driving customer purchasing decisions.

It's been small RALs and it hasn't had much of an effect on us to this point.

Okay.

Got it.

Makes sense.

On the credit, so nice seeing the credit improving at the same time that your volumes increasing and your sales traffic increasing, so that's pretty impressive.

I'm just wondering if you could describe what has been driving credit better if it's been -- how much of that has been on the macro side, so the consumer getting -- your consumer getting better versus the actions that you've taken?

And then when you think about recoveries and car prices for 2019, do you have a view of where car prices are going to be going?

So on the credit side, I mentioned that we had lower frequency of losses, and I think a lot of that relates back to the better car that Jeff mentioned, much easier to keep a customer in a car that's running.

So I think we've done a better job there.

And then our collection practices, getting the resolution sooner and working through those before they get to the point that they can't recover and it is a loss.

So I think that's helped in the -- on the frequency side.

On the severity side, we talked about our increased collections, our downs were flat, but our 90-day upfront equity has improved.

And that fair market value has also helped in that severity.

So I think we'll see fair market values stay elevated here for a while.

And again, I think with our better vehicle and our better processes as far as getting those moved quickly, not letting them sit around on a lot, will continue to help keep our fair market values up on those recoveries.

Okay.

That's helpful.

And the last one for me and just quickly.

So on your increased traffic and on your -- the retail sales prices increasing, just wondering how much of that is being driven off of the actions that you're doing to improve the business versus what you're seeing with the industry improving?

I know you've kind of talked about the competition still being very competitive out there, but maybe it's a little bit better year-over-year.

Just kind of wondering if there's a way to parse out the 2 impacts to your business?

Well, I think having better cars out front, properly cleaned and displayed and titled, certainly that one factor in and of itself increases your lot traffic.

But then when you combine the efforts in place for our online presence too, even though we're not finished with that effort, it will be a while, we are really looking at Google reviews and really trying to maximize the customer interaction on the webpage.

We've got a new webpage.

And so we think a lot of traffic is coming from our digital presence.

And then also just doing a better job getting good cars, cleaned and titled and out front and ready for sale and properly displayed, and then blocking and tackling at the lot level when we do have a prospect.

So I don't know that I would say much of our traffic improvements is competitive in nature, although it might be.

It's hard for us to tell, but I do know the improvements we've made internally is certainly helping us with those traffic counts.

Okay.

Helpful.

And one more question, just from your response.

So the online presence and increasing your customer interactions on the website, is that being driven from the dealership level or -- so the dealership interacts with the customers that are close by?

Or is it something of a corporate effort, where there's people from the corporate level interacting with the customers so as to come into the website?

It is a -- at this point, it's been a corporate effort.

But as we go forward, our dealership associates are the ones that have the relationships with our customers.

So I would say, we all feel pretty strongly, at the end of the day, it needs to be that local general manager and his or her staff that are communicating with our customers digitally.

But we're kind of phasing into that as we work through the process and try to improve that customer experience.

And they are getting turned over to the dealership.

Yes.

They do get turned over.

But currently, as we're learning, the best way to do this, we are making the initial contact from out of corporate here.

Our next question comes from Kyle Joseph with Jefferies.

Just -- most of my questions have been answered.

Just wanted to talk about your customers' preferences in terms of cars and given gas price fluctuations, have you seen any changes there?

Are we still seeing a big demand for trucks and SUVs?

The mix was relatively flat this year compared to last year.

I mean, the demand for trucks and SUVs is still out there, but we did not see those increase this quarter like we have in the past couple of quarters.

Got it.

And then just transitioning to credit.

Obviously, it's been very strong and just -- if you could talk to your credit metrics and how you think about managing the business?

Do you think there's room for improvement?

Do you think you're leaving some deals on the table?

And just talk about your outlook there.

We feel good about the positive movement with credit results.

We are proud of the progress being made.

We do feel like, in all areas, and including credit that there's things we can do a lot better.

So we're not at all satisfied.

We feel like there's a lot of improvements to be made.

It's hard to know -- I think we've talked for a number of years about the fact that our charge-offs went from the low 20s to the low 30s, and now we're going back the other direction.

There's some things about the industry that have changed that might prevent us from mathematically getting back to where we were in 2009 or '10, but we feel like we do have some room to continue to push forward and to see improved credit results, especially when we bring in this fifth nonnegotiable we talked about, and that's the customer experience.

We've seen some really good results in all areas, and we know for a fact we can do a much better job with the customer experience at those key touch points.

And the first place that shows up is in improved credit results.

So we don't have a specific range or a number, but we know we're not satisfied with where we're at, even though the trends and the improvements have been something to be proud of.

(Operator Instructions) And I'm showing no further questions at this time.

I'd like to turn the call back over to Mr. Jeff Williams for any closing remarks.

Okay.

Once again, thank you for joining us this morning.

Thanks for your interest in America's Car-Mart, and have a great day.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes today's program.

You may all disconnect.

Everyone, have a great day.