America’s Car-Mart - Earnings Call - Q3 2019

Transcript

Speaker 0

Good morning, everyone. Thank you for holding, and welcome to the America's Car Mart Third Quarter twenty nineteen Conference Call. The topic of this call will be the earnings and operating results for the company's third quarter for fiscal twenty nineteen. Before we begin, I would like to remind everyone that this call is being recorded and will be available for replay for the next thirty 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.carmart.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 obligations to update such forward looking statements. For more information regarding forward looking information please see part one of the company's annual report on Form 10 ks for the fiscal year ended April 3038 and its current and quarterly reports furnished to or filed with the Securities Exchange Commission on Forms eight ks and 10 Q. Participating on the call this morning are Jeff Williams, the company's President and Chief Executive Officer and Vicki Judy, Chief Financial Officer.

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

Speaker 1

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 non negotiables 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 go ahead and turn it over to Vicki to go over some numbers. Vicki?

Speaker 2

Good morning. For the quarter, overall revenues were $161,000,000 with same store revenues up 8.5%. This resulted from a nine percent increase in sales and an 11.6% increase in interest income. Revenues from stores in the 10 years of age category was up 8%. Stores in the five to ten year category was up 8% to about $36,000,000 Revenues per stores in the less than five years of age category was up about 30% to about $20,000,000 We've continued to see increased traffic at our dealerships 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 in 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 zero to five years old, 36 or 25% were from five to ten years old and the remaining 84 were ten 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 ten year lots, ten 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 five to ten year category produced 25.6 compared to 24.7 for the prior year quarter and the lots less than five 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 twenty nine point four months compared to twenty nine point five for the prior year quarter and up from twenty nine point two months sequentially. Our weighted average contract term for the entire portfolio, including modifications, was thirty two months for the third quarter compared to thirty two point four for the prior year quarter. The weighted average age of the portfolio was basically flat at approximately nine 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 2,200,000 compared to the prior year quarter due to the $45,500,000 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 2016. 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 2018. 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 and A.

SG and A dollars were up $1,600,000 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've 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 2019 and the prior year tax benefit resulted from a $9,700,000 adjustment recorded primarily due to the enactment of the Tax Cuts and Jobs Act in December 2017. 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 $171,000,000 and we had over $44,000,000 in additional availability under our revolving credit facility. We did amend our revolving credit facility in December 2018 to extend the term to December 2021. We increased the total permitted borrowings from $200,000,000 to $215,000,000 and reduced the current applicable interest rate by 10 basis points until May 2019. 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 $10,200,000 at an average cost of $72.2 per share. Since 2010, we have repurchased approximately 53% of the company for $222,000,000 at an average price of $36 per share. We continue to have strong cash flows. For the nine months, we've added $41,500,000 in receivables, repurchased $24,100,000 of common stock, funded $3,000,000 in capital expenditures and increased inventory by $5,200,000 a total of $73,800,000 with only $18,400,000 increase 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.

Speaker 1

Okay, thank you Vicki. Our non negotiables relate to number one facilities and associates. Number two inventory. Number three, Collections Practices. And number four, Expense Management with our fifth non negotiable, Customer Relations and Customer Experience being a part of but separate from the other four.

Our improved financial performance to this point has been mostly the result of our disciplined focus on lot level blocking and tackling, the non negotiables one through four where we still have a lot of work to do but are 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 hardworking 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 four non negotiables.

However, experience is emerging as our top priority as we strive to be a great company. As mentioned in the press release, we have four 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.

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'll now open it up for some questions. Operator?

Speaker 0

At this time the participants will now answer questions from the callers. I would like to reiterate that my comments regarding forward looking statements apply both to the participants prepared remarks and to anything that may come up during Q and A. If you would like to ask a question press the star then the one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue press the pound key. And our first question comes from John Murphy with Bank of America Merrill Lynch.

Your line is open.

Speaker 3

Good morning. 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 your 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?

Speaker 1

Yes, 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've 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 collection side.

Speaker 2

I might also add to that Eileen. I think our deal structure and I mean that's part of our collection practices. I think our whole deal structure and the way we're modifying accounts, continue to work on that area as well. And I think that's helping in this.

Speaker 3

Okay. Great. That's very helpful. Second question, there's been reports probably over the past two, three 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 two, three weeks around tax season and refund filing seeing 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?

Speaker 1

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 timing's 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're 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 February and on to a good portion of March. So, you know, the government shutdown and all the noise out there has maybe put up you know 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.

We feel pretty good about things.

Speaker 3

Great. That color is really helpful. And then last question following up on some of the prepared remarks you made around investing in a better website. I realize 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

Speaker 2

your stores as a result?

Speaker 1

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 to be a huge dollar investment for us And we've been working on it for six or seven 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 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 to 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.

Speaker 3

Okay. That's very helpful. That's it for me. Thanks for the questions.

Speaker 1

Thank

Speaker 0

you. Our next question comes from John Rowan with Janney. Your line is open.

Speaker 4

Good morning.

Speaker 2

Good morning.

Speaker 4

So I want to kind of address just the improvements on two 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 and modifying accounts. Can you give us some specific examples within those two areas of what you're doing specifically to improve, collection speed or whatever areas of your business are showing positive comps year over year?

Speaker 2

So on the collections side, we kind of looked at our account representatives who make our collections 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, you know, 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 relation to those collections.

Speaker 1

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 then 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 then 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.

Speaker 4

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

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

Speaker 1

You know, 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

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 non negotiables and the blocking and tackling and us getting better at what we do.

Speaker 4

Okay. Thank you very much.

Speaker 1

Thank

Speaker 0

you. Thank you. Our next question comes from Vincent Caintic with Stephens. Your line is open.

Speaker 5

Hey thanks. Good morning guys. Just a quick follow-up on the tax refund questions, season question. 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 payoffs or a lot of down payment activity happen because of the tax refund season?

Speaker 2

Yes. So that's typically in February. It starts in February and then it will run some into March as well. But typically the biggest part of February.

Speaker 5

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

Speaker 1

Not a big change. There had been some refund anticipation loans but it's been smaller dollar amounts and not really driving customer purchasing decisions. It's been small rouse and it hasn't had much of an effect on us to this point.

Speaker 5

Okay. Got it. Makes sense. Thank you. On the credit, so nice seeing the credit improving at the same time that your volume is increasing and your sales traffic is 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 in car prices for 2019, do you have a view of where car prices are going to be going?

Speaker 2

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, you know, when it is a loss.

So I think that's helped on the frequency side. On the severity side, you know, we talked about our increased collections. Our downs were flat, but our ninety day upfront equity has improved. And then that fair market value has also helped in that severity. So, you know, 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, we'll continue to help keep our fair market values up on those recoveries.

Speaker 5

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 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 two impacts to your business.

Speaker 1

Well, you know, 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'll 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.

Speaker 5

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 as they come into the website?

Speaker 1

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.

Speaker 2

They are getting turned over to the dealership.

Speaker 1

Yes, they do get turned over.

Speaker 2

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

Speaker 5

Okay, got it. Thanks very much.

Speaker 1

Thank

Speaker 0

you. Our next question comes from Kyle Joseph with Jefferies. Your line is open.

Speaker 6

Good morning, guys. Thanks for taking my questions and congrats on another good quarter.

Speaker 2

Good morning. Thank you.

Speaker 6

Just most of my questions have been answered. Just wanted to talk about your customers' preferences in terms of cars and gas price fluctuations, have you seen any changes there? Are we still seeing a big demand for trucks and SUVs?

Speaker 2

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 the past couple of quarters.

Speaker 6

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?

Speaker 1

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 including credit that there's things we can do a lot better. So we're not at all satisfied. You know, 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 2010. But we feel like we do have some room to continue to push for and to see improved credit results especially when we bring in this fifth non negotiable we talk 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.

Speaker 6

Great. Thanks very much for answering my questions.

Speaker 1

Thank you.

Speaker 0

Thank you. 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.

Speaker 1

Okay. Well 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.

Speaker 0

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.