America's Car-Mart's (CRMT) CEO Hank Henderson on Q3 2016 Results - Earnings Call Transcript

| About: America's Car-Mart, (CRMT)

America's Car-Mart, Inc. (NASDAQ:CRMT)

Q3 2016 Earnings Conference Call

November 18, 2016 11:00 AM ET

Executives

Hank Henderson - CEO

Jeff Williams - President, CFO

Analysts

Elizabeth Suzuki - Bank of America

Bill Armstrong - CL King & Associates

Mike Del Grosso - Jefferies LLC

Brian Hollenden - Sidoti & Company

Operator

Good morning everyone. Thank you for holding and welcome to America's Car-Mart's Second Quarter 2017 Conference Call. The topic of this call will be the earnings and operating results for the Company's fiscal second quarter of 2017. Before we begin, I would like to remind everyone that this call is being recorded and will be available for replay for the next 30 days. The dial-in number and access information are included in last night's press release, which can be found on America's Car-Mart's website at www.car-mart.com.

As you all know, some of management's comments today may include forward-looking statements which inherently involve risks and uncertainties that could cause actual results to differ materially from management's present view. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company cannot guarantee the accuracy of any forecast or estimate, nor does it undertake any obligation to update such forward-looking statements. For more information regarding forward-looking information, please see Part 1 of the Company's annual report on Form 10-K for the fiscal year ended April 30, 2016, and its current and quarterly reports furnished to or filed with the Securities and Exchange Commission on Forms 8-K and 10-Q.

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

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

Hank Henderson

Good morning and thank you all for joining us. As you can see on our press release this morning, we put together another solid quarter with net income of 5 million or $0.62 a share. We're very pleased with the sales for the quarter; revenues were 150 million which is an increase of 12.9% over the same time last year, retail unit sales were up 11.8%, putting us at over 12,000 retail sales for the quarter. Average units sold per month were up significantly for all the store age brackets which Jeff will give you more detail on in just a minute, and it is particularly encouraging to see the sales increase at our older dealerships. We know from experience many of these stores have a lot more capacity, and it is nice to see that we're getting some of that back.

We're also seeing some very positive result from our efforts to improve inventory management, reduced repair experience along with a lower number of wholesales might for an increase in a gross margin compared to where we were last year, we were at 41.4% versus 39.2%. We are doing a much better job with how we are spending money on parts and repairs, and we still have meaningful improvement in that area. We have also tightened that policies and procedures regarding how inventory units during the course of this past year and that is making us much more efficient, sometime can forget, we can actually do more with less, if we do it right. And we have been making progress getting that balance more in line with the true optimum point.

So I’ll go ahead and turn it over to Jeff now to give you more details on our recent results and then I will come back to you with few formal comments.

Jeff Williams

Thank you, Hank. As Hank mentioned, total revenues increased 12.9% to 150 million with same-store revenues up 11.6%. Excluding the effect of the four dealerships that we closed during the fourth quarter of last fiscal year, revenues were up about 14%. Revenues from the stores in the 10-plus year category, was up around 12%. Stores in the five- to 10-year category revenue was up about 10%, and revenues in our stores that are less than five-year old was up about 25% to 32 million.

The overall average retail units sold per month per dealership for the quarter was 28.4, that’s up from 25.3 for the second quarter of last year, and up from 27.9 sequentially. We do see that our productivity improvement is even more impressive given in the fact that our customer base might be just a little fatigued after so many years of loose credit with extended terms, so very happy with top line growth.

At the end of the quarter, 37% or 26% of our dealerships were from 0 to 5 years, 23% or 16% were from 5 to 10 years old, with the remaining 83 dealerships being 10 years old or older. Our 10-year plus lots produced 30.8 units sold per month per lot for the quarter, compared to 26.8 for the prior year quarter, and compared to 30.6 for the first quarter.

Our lots in a 5 to 10 year category produced 25.5% compared to 23.3% for the prior year quarter and compared to 26.5% for the first, and lots in the less than five year age category had productivity of 24.7 compared to 22.6 from last year's second quarter and compared to 23.1 for the first quarter.

As Hank mentioned, our older dealerships are in a good positions to take advantage of market opportunity for increased volumes as we look forward. Our average selling price increased 2.4%, $244 to $10,491 compared to the prior year, an increase of $98 or 1% sequentially. The increase from the prior year relates to general increases in selling prices, as we worked to improve the quality of our vehicles.

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

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

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

Our weighted average contract term for the entire portfolio, including modifications, was 31.7 months, which was up from 30.6 at this time last year and flat sequentially.

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

Interest income was up 1.7 million compared to the prior year quarter due to the $41.2 million increase in average finance receivables, and to a lesser extent to our increase in the interest rate on our contract to 16.5% from 15%, which began in May of this year. The weighted average interest rate for all finance receivables at the end of the quarter was approximately 15.47%. That's up from 14.9% at this time last year.

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

Our continuing efforts to improve the quality of our inventory and improve inventory turns and efficiencies is having a positive effect, and will benefit us as we move forward. We have been very aggressive with inventory quality, repair costs, inventory turns, stale inventory, and our efforts are certainly showing up with improved gross profits.

We will keep pushing for improvements with inventory management, and will focus on keeping our gross margin percentages up. As always, we do a lot of work to earn our margins, and we need to execute at the very highest level in this area of the business.

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

For the quarter, SG&A as a percentage of sales was 17% that compared to 18.9% for the prior-year quarter. We certainly saw the leveraging benefit from the top line growth, and we continue to believe we have a very lean but effective cost structure, and we will focus on cost controls as we move forward.

At the same time, we will remain mindful of how important it is in this high touch business, to ensure that our infrastructure is solid to support our customers before, and after the sale in an effective manner.

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

Principal collections as a percentage of average finance receivables for the quarter was 12.6% compared to 13.7% for the prior year quarter. This decrease resulted mostly from the longer average contract term, higher levels of contract modifications, slightly higher delinquency rates and to a lesser extent to our increase in our contract interest rates.

The lower collection percentage resulted in almost a 100 basis points in the provision for credit losses on the income statement as we reserved a 25% of uncollected AR. We continue to believe that we are selling a higher quality vehicle, slight improvement with the age and mileage to a better credit risk customer.

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

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

Once again, we believe the access to better cars at better prices will have a positive effect on our credit losses as we look forward. At the end of October, our total debt was a 124.7 million. We repurchased about 25,000 shares during the quarter for about $900,000. Our current debt to equity ratio is 53%, and our debt to finance receivables ratio is a very healthy 26%.

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

Now, I'll turn it back over to Hank.

Hank Henderson

All right, thanks Jeff. We're obviously pleased that we're putting together a much better bottom line results, but at the same time, we know we can do so much better. We've made some very positive improvements in most areas of the business, and we've made a great level of progress with regard to our credit loss as that area was relatively flat, and that is of course also the most challenging piece of our business and does require the greatest energy and expertise; and that expertise does obviously require a certain level of experience.

As we certainly have a number of relatively newer general managers, it's imperative that we assure that each one of them are receiving the best possible training, leadership and support as they're gaining the much needed invaluable experience. While most of their guidance is provided by our area operations managers and our regional VPs, we've also added a couple of additional trainers out in the field to help support the effort at this time.

Each of these individuals has many years of experience and lot operations with our company and now working with our new general managers to impart their experience and make sure that each general manager has the best possible processes in place at their store to help them be as efficient as possible. We do recognize that our general managers have a challenging job, and we are working hard to improve the level of support we provide to each of them in every area.

At this time, we need to allow this group of new managers to season more keep and keep our resources focused on supporting them while we get more experience under their belt, so that as we begin to open new stores, we can be more confident that our existing stores are operating as efficiently as possible.

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

So that concludes our prepare remarks. So, we would now like to move to your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instruction] Our first question for the day comes from the line of Elizabeth Suzuki from Bank of America. Your line is open.

Elizabeth Suzuki

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

Hank Henderson

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

Elizabeth Suzuki

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

Hank Henderson

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

Elizabeth Suzuki

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

Hank Henderson

Well, obviously, we are hearing the same things at the ground level talking with the general managers; at the store level, they aren't seeing a big change yet. The competition that's been out there seems to continue to be aggressive. I think what we are seeing more of and one thing that’s helping us is, this is going on long enough that there has been a kind of a cycle with our customers. I think we have had some who have been over and try that more recognize that our face-to-face presences, more or what they need and also the -- our terms are much shorter. The relationship is important to them. So, I think we are seeing some customers have kind of cycled through that. So, we are getting some benefit from that, but can't really speak to specific loosening up on the comparative front.

Operator

Our next question comes from the line of Bill Armstrong from CL King & Associates. Your line is open.

Bill Armstrong

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

Jeff Williams

I think there is a few and I think one of the things that I just mentioned talking with some of our larger store managers that have been around a long time. Some of the customers are coming back that have been out and tried that would be that a piece to that. And as we have also talked about, I think we are doing a better job with the inventory is not a dramatic difference, but for the same money, we're seeing a little bit lesser miles I think we are doing a better job on that front. And also just to our sales and marketing, we had a little bit more sophistication this year little bit more digital marketing where we are really about the past six to eight months, beginning to see our hits on that go up. So I think these things combined and like I just said earlier just the basic blocking and tackling just trying to do better job with customer service at the local level.

Hank Henderson

Last year second quarter was not a great quarter in top line, so we had a pretty easy confidence. We think we get some more room to grow in a healthy way in the top line.

Bill Armstrong

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

Hank Henderson

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

Bill Armstrong

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

Hank Henderson

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

Bill Armstrong

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

Hank Henderson

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

Jeff Williams

But I would say that we did end October of '15 with a really low 30 plus number, if you look back historically, we're generally little higher than that. So, the part of that is due to the comp being to pretty low quarter last year, but it is higher than we'd like to see and we're certainly focused on that.

Operator

Thank you. Our next question comes from the line of Mike Del Grosso from Jefferies. Your line is open.

Mike Del Grosso

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

Jeff Williams

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

Mike Del Grosso

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

Jeff Williams

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

Operator

[Operator Instructions] We'll be taking our next question from the line of Brian Hollenden from Sidoti. Your line is open.

Brian Hollenden

How much of the gross margin improvement was due to inventory efficiency versus lower repair costs, and how much more room is there to improve gross margin?

Jeff Williams

It's kind of hard to separate efficiencies from just repair costs. They can't work together if you're repairing more cars, especially wholesale cars. You've got some additional expenses that just relate to the increased number of cars, but we've been very pleased with efforts on the repair side, really pushing hard in that area. And we expect to continue to seek good results there. We work very hard for those gross margins and our folks are working really hard to minimize repair expenses and then repairs that we do have to do, we're working hard on getting good parts rates and labor rates, and we are optimistic that we can keep that going.

Brian Hollenden

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

Jeff Williams

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

Brian Hollenden

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

Hank Henderson

No, that wouldn’t be big, but it's certainly it is probably handful of customers in there that we are able to retain particularly somewhat little better repeat customers that may have had some other options. We tend to get a little more aggressive with some of those folks on hiring cars, but I don’t think that was one of the bigger factors for it.

Jeff Williams

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

Brian Hollenden

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

Hank Henderson

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

Operator

Thank you. [Operator Instruction] I am seeing no other questions in the queue at this time. So I would like to turn the call back over to management for any closing comments.

Hank Henderson

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

Operator

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

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