Hank Henderson - Chief Executive Officer Jeff Williams - President, Chief Financial Officer

Elizabeth Suzuki - Bank of America John Rowan - Janney John Hecht - Jefferies Brian Hollenden - Sidoti

Good morning everyone. Thank you for holding and welcome to America’s Car-Mart’s Third Quarter 2017 Conference Call. The topic of this call will be the earnings and operating results for the Company’s fiscal third quarter 2017. Before we begin, I would like to remind everyone that this call is being recorded and will be available for replay for the next 30 days. The dial-in number and access information are included in last night’s press release, which can be found on America’s Car-Mart’s website at www.car-mart.com. As you all know, some of management’s comments today may include forward-looking statements which inherently involve risks and uncertainties that could cause actual results to differ materially from management’s present view. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company cannot guarantee the accuracy of any forecast or estimate, nor does it undertake any obligation to update such forward-looking statements. For more information regarding forward-looking information, please see Part 1 of the Company’s annual report on Form 10-K for the fiscal year ended April 30, 2016, and its current and quarterly reports furnished to or filed with the Securities and Exchange Commission on Forms 8-K and 10-Q. Participating on this call this morning are Hank Henderson, the Company’s Chief Executive Officer; and Jeff Williams, President. And now I’d like to turn the call over to the Company’s Chief Executive Officer, Hank Henderson.

Good morning everyone and thank you all for joining us. As you saw on our press release, our top line was up somewhat 1% for the quarter over the same quarter last year. On a unit basis while we were actually down slightly overall from 11,013 to 10,866, we were up just a bit on a per-store basis from 25 to 25.3 due to the closing of four stores in the fourth quarter of 2016. While this is an increase in the top-line, we were still a little disappointed as we have been making better gains thus far thus far through the year. For the nine months, we were at 27.2 units sold per store versus 26.4 for the same period last year, 34,990 in total over 34,138. There was a significant delay in the income tax refunds this year, actually close to a full month behind compared to last year, so there wasn’t a pickup in sales in the latter part of January from those customers that had already gotten their refunds in hand, as we typically see. So, this obviously had an effect on not being where we would like to have been. We have recently been informed however that after this long delay, the first wave of checks will actually be in customers’ hands this week. So we are well stocked to an inventory and so we should be able to make up part of that. Throughout the year we’ve, leaned up and realized some good improvement on the SG&A and also improved on our gross margin as well to remove our effective management of our repair expenses. And Jeff will give you the detail on all this in just a moment. The area where we did not see improvement however was in credit losses. Net charge-offs for the quarter were 7.8% versus 6.6% last year. So, while we are in better shape on the nine-month comparison, we are disappointed in the direction we took for the quarter. We did however in the quarter, in little better shape on 30 plus data delinquencies. Then last, we are in a position to show some improvement here in this area going forward. So, I’ll go ahead and turn it over to Jeff now to give you more detail on our recent results and then come back with a few final comments.

Thank you, Hank. As Hank mentioned, total revenues increased 1% to $139 million with same-store revenues up 1.1%. Excluding the effect of the four dealerships we closed during the fourth quarter of 2016 and three additional dealerships that we’ve recently decided to wind-down to close, total revenues up 2.4% and same-store revenues was up 1.7%. Of the three dealerships were Nicholasville, Kentucky, Discount Auto, North Little Rock and Albany, Georgia. Revenues from stores in the 10-plus year category, was up around 1.6%. Stores in the five- to 10-year category was down about 7% to $17 million, and revenues for stores in the less than five-year age category was up about 8% to $29 million. The overall average retail units sold per month per dealership for the quarter was 25.3, that’s up from 25 for the third quarter of last year, and down from 28.4 sequentially. As mentioned, our productivity would have been better but the overall market has been a little soft. We actually had good traffic during the quarter but the quality of the traffic was off a little bit. And thus, productivity suffered just a bit. And the delay with income tax refund certainly hurt us at the end of the quarter. But we have some initiatives underway that will help us going forward on the revenue side. At quarter end 36% or 26% of our dealerships were from 0 to 5 years of age, 21% or 15% were in the 5-year to 10-year old category, and the remaining 83 dealerships were 10 years old or older. Our 10-year plus lots produced 27.9 units sold per month per lot for the quarter, compared to 27.5 for the prior year quarter, and 30.8 for the second quarter. Our lots in a 5-year to 10-year category produced 22.5% compared to 24.2% for the prior year quarter, and the lots less than five years of age had productivity of 22.2 compared to 21.6 for the third quarter of last year. Our older more established dealerships are in good position to take advantage of market opportunities for increased volumes. And as we have said, the overall market has been a little hard to read. And tax time delays will push some sales into our fourth quarter this year. Our average selling price increased 0.3% or $30 to 10,629 compared to the prior year, and increased $138 or about 1% sequentially. The flattening out of our sales price has been expected and we’re working hard to find higher quality vehicles for lower prices in this market to maintain affordability for our customers. We currently anticipate some overall sales price increases for the near term as the demand for the cars we buy is high, especially trucks and SUVs. But we are hopeful that prices will continue to soften compared to prior years. And that will be at a position to put our customers in better cars for less money. Our down payment percentage was 4.3%, compared to 5.3% for the prior year. The decrease was offset some by improvements in special payments on the front end of the contracts. Collections as a percentage of average finance receivables was 12.4% compared to 12.9%. Our average initial contract term was 29.4 months compared to 29.3 for the prior year quarter, and up slightly from the second quarter’s 29.1. Our weighted average contract term for the entire portfolio, including modifications, was 31.9 months, which was up from 30.9 at this time last year and basically flat sequentially. The weighted average age of our portfolio was 8.9 months, that’s up from 8.6 at this time last year and up from 8.5 months sequentially. Due to the slightly increasing ASP and for competitive reasons, our average term lengths may continue to increase some into the future, but we remain committed to minimizing any increases. If competitive offerings get more conservative, we will have room to keep terms down. As always, we will try to ensure that the term length and the useful life of the vehicle are in alignment, and we will continue to put our customers in good vehicles. Interest income was up $1.8 million compared to the prior year quarter due to the $37.8 million increase in average finance receivables that was about 75% of the increase and to our increase in the interest rate for our contract to 16.5% from 15%, which began in May of this year that was about 25% of the increase. We’re about a third of the way to having all of our contracts put that higher rate at this point. The average interest rate for all finance receivables at the end of the quarter was approximately 15.7%. That’s up from 14.9% at this time last year. For the third quarter, our gross profit margin percentage was 40.8% of sales. That’s up from 40.3% from the prior-year, and down just a little sequentially due mostly to the resale sales volumes being a little lower. 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 have been very aggressive with inventory quality, repair costs, and inventory turns and stale inventory, and our efforts are certainly showing up with improved gross profit results. 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. For the quarter, SG&A as a percentage of sales was 18.7% compared to 19.4% for the prior-year quarter. Overall SG&A dollars were down by about $900,000. We believe that we have a very lean but effective cost structure, and we will continue to focus on cost controls as we move forward. We’re very proud of our associates and their dedication in helping us, keep our costs down. At the same time, we will remain mindful of how important it is in this high touch business, to ensure that our infrastructure is solid to support our customers before, and after the sale in an effective manner. We will continue to increase our investments in our GM recruitment and advancement program, our collections efforts and in our sales and marketing efforts as we have significant room for improvement in these critical areas, and have fallen little behind in the last few years. For the current quarter net charge-offs as a percentage of average finance receivables, was 7.8% that’s up from 6.6% for the prior year quarter, and up from 7.7% sequentially. The increase related to the higher frequency of losses for the quarter excluding the seven dealers that are winding down or close down, charge-offs were about 7.6% for the quarter, still much higher than we’d like to see. We will note that net charge-offs for the full nine-month period was 21.8% compared to 22.2% for the prior year. Our wholesale value recovery rates continue to come under significant pressure. But that leveled off the last few quarters. And we’re hopeful that we’ve bottomed out with recovery rates. Our recovery rates for the quarter were again in the 22% to 23%, which is historically low. Our principal collections as a percentage of average finance receivables for the quarter was 12.4% compared to 12.9%. The decrease resulted mostly to the longer average term, higher levels of contract modifications, a lower level of early payoffs which most likely related to the income tax refund delays and the increase in our contract interest rate offset by slightly lower delinquency rates. The lower collections percentage resulted in almost a 50-basis point increase in the provision for credit losses on the income statement as we reserve a 25% of uncollected receivables. The credit loss percentage on the income statement would have been right at 30% and collections been a little higher but were short due to tax time. We’ve sold a few hundred more cars again, somewhat related to tax time and excluding the seven dealerships that are being closed. Delinquencies are slightly lower at this point than they were last year. And we continue to believe that we’re selling a higher quality vehicle, slight improvement with age and mileage to better credit risk customer. Again, lot traffic was up, but the closure rate was down some. That’s just due to the quality of the traffic we’re seeing. As discussed earlier, we’ve seen great execution improvement with our inventory management and we do expect to move the needle in the positive direction with similar efforts and increased investments in collections and in our sales and marketing efforts. We don’t know what the competitive landscape looks like in the future, but we plan to run our business efficiently and effectively with an eye towards solid profitability and growth. At the end of January, our total debt was $119 million, and we had almost $80 million in additional availability under our revolving credit facilities. Our current debt to equity ratio was 49.6% and our debt to finance receivables ratio was 25%, that’s down from 27.6% at this time last year. We have a lot of room to grow and there is a big demand for our offering. While we are certainly disappointed with our GAAP earnings and know that we can do much better in efforts to improve results with existing dealerships. Our intense focus on our cash-on-cash returns has allowed us in the last 12 months to grow receivables by $32 million, repurchased $12 million of our own common stock, fund $1.7 million in net capital expenditures, all while actually paying down debt by $3.7 million. We will get collections right, and we will get sales right and we will attract and retain quality individuals to manage our dealerships. And we will grow the business in a healthy manner into the future. We will take a little time but we are determined to make it happen. It is important to note that over the last several years, our GAAP numbers have naturally moved to more of a cash basis due to the higher loan loss reserve percentage, the increase in term lengths, the deferral of revenue with our two add-on products and with the increase in our interest rates on our contracts. Our cash-on-cash returns have remained very strong. Now, I turn it back over to Hank.

All right, thanks Jeff. Our mission and focus going forward is very clear and that is to work to improve customer service at every level and likewise our relationships with our customers. With our local face-to-face presence combined with our strong values, with many years of experience, we’re in a better position than anyone to work with our customers through the challenges and earn the repeat business. We have recently identified some specific areas of opportunity to deliver better customer service and we’re working to make the necessary improvements and corrections in this area, and are confident that taking better care of our customers will ultimately be reflected in our results. As was mentioned in the press release, we are working with an outside firm to help get us more up to date and efficient in our marketing and communications, and have a more cohesive strategy and delivering our message. This was needed and we are extremely excited about the impact this will have. However, we are acutely aware that there is no advertising or any marketing that is any sort of substitute for or as powerful as word-of-mouth reputation we have in each of the communities we’re in by delivering excellent customer service and developing good long-term relationships with our customers. That is what got us here and that is what we’ll assure our continued growth into the future. We are pleased with some positive things we’re seeing with our initiatives improve the development and support of our new and future general managers. Our intent is to continue to grow on our strengths here to create internal pressure to grow. Certainly when we begin to open these doors in the future which, is our plan, we will be doing so in a healthy fashion. We’re very excited about both the near-term and long-term future of our company. And as we pointed out that while not on every front have we realized the level of improvement we would have ideally liked to have made so far this year. We have seen improvement on the last, and so, that means we’re headed in the right direction with each area of our business. We’ve got a great team here that’s committed to staying on point in every category to assure we will continue to build on the positive direction we’ve seen this far. So that concludes our prepared remarks. We would like to now move on to your questions. Operator?

[Operator Instructions] And our first question will come from the line of Elizabeth Suzuki with Bank of America. Your line is now open.

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

It’s a little hard to tell. Last year, the tax money was out basically for the last week of January. So we feel like looking back that we had maybe 300 sales last year that didn’t happen this year because of the timing of tax refunds. And yes, theoretically that should all roll into the fourth. But the money has been delayed a full month. We’re just now receiving it. So there is some risk that maybe a little lower this year but our expectations at this point are that initial fall in the first quarter if we execute the way we’re planning to should roll into the fourth quarter with the volumes.

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

Yes, of course, the trucks and the SUVs are really high on the pricing. So that’s been a challenge. And then, the cars at the low end especially when they have to be repossessed or not carrying much value at all. So we do have a situation where we having to pay up on the buy side, especially with trucks and SUVs. And then when we do have to take one back or repossess one or get a trade in, it’s not worth much at auction in a wholesale market. So that dynamic has been going on a while and it continues today. We didn’t see to spike this year during income tax time. We normally see a big spike in purchase prices for all cars especially trucks during the fall months and on into the early spring months. We’ve not seen a big jump this year like we have in the past. So we’re optimistic that looking forward, we’re going to be able to buy better car for less money.

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

Yes, as I mentioned in my commentary, the GAAP numbers and the cash numbers are getting a little closer. And the longer - our terms are for our average contracts, the more contracts we have outstanding any time you have a quarter or a period of time where your top-line is kind of flattened out, when you have more contracts out there that could go bad, then sometimes on a quarterly basis or a short period of time, it will cause credit losses, charge-offs and net income statement provision to be higher. And that’s just mechanics or the math behind having a larger portfolio stretched over a larger period of time, measured against one quarter of sales. And then we did have a kind of flattening of the sales side. So, when you look at the cash on cash returns over the entire life of the contracts, we’re still doing very, very well with that measurement. It’s just sometimes on a quarterly basis, especially when top-line is flat that will give you a higher result on the credit loss line.

Great, thanks. That’s very helpful.

Thank you.

And our next question comes from the line of John Rowan with Janney. Your line is now open.

Good morning, guys.

Good morning, John.

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

Yes, I think that was in reference to the fact that our delinquencies year-over-year were little bit lower than we were the same time a year ago. So, based on that fact I think it’s reasonable to assume that in the near term on a year basis we should be in better shape than we were at this time. Now, also I think we’re working through we’ve talked a lot about the competition. And right have some of our customers had deals pushed at them that I think we’re coming cycling through that that ought to begin to flatten out and normalize somewhat I think. So, I do think that we recognize some opportunities here and just improvements we’ve seen thus far, we ought to see little bit lower losses going forward than where we were that’s our intent.

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

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

Okay.

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

I spoke to someone two days ago who said when they went in to take the GPS unit out there were six units in there. It had been repo a bunch of times before, which is fine. I was just curious. And then I was a little surprised to see the share count actually move up on a sequential basis. What are your plans for share repurchases? And did you repurchase anything in the quarter?

Yes, we didn’t repurchase during the quarter. We are always out there opportunistically. And the increase just related to some stock option exercises.

All right. Thank you.

Thank you.

Our next question comes from the line of John Hecht with Jefferies. Your line is now open.

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

Yes, there is a little seasonality more than anything for the current quarter that the top line was a little short as though we thought it would be had we had a few more retail sales in there that would have been at or above last year’s numbers. So it was more affected by just the short-fall of the top-line on what we were expecting. And in the fourth quarter, historically there have been more wholesale transactions rolling through the fourth quarter. So that’s a natural drag on gross margins for that fourth quarter plus the selling prices for cars after tax refunds are received, the selling prices are a little higher during that fourth quarter which brings the margin percentage down. But our inventory is so much cleaner at this time last year, this year compared to last that we don’t expect to have as big a drag in the fourth quarter on the wholesale side.

Okay. That’s helpful. Thanks. And, second, I know you guys talked about pretty intensively competitive environment with the indirect lenders and so forth. I’m wondering, number one, are you seeing any change in patterns there? Is there anybody rationalizing or pulling back at this point? Or is it still all kind of full bore? And then second, what are the other buy here pay here operators, you see them under duress and does that give you guys more opportunity what’s the competitive environment rationalizes?

So there are lots of questions, I don’t think there is much question it’s truly normalizes to release we feel like they ought to be. Several years back I think there will be less competition on the other side of that. They’ve got to feel the same pressure that we have. And I would suspect that during this time there have been, some exit to market or kind of remodel their business to where they’ve been using some of the indirect lenders. So, we definitely expect on the other side there is some benefit to the competitive market. And right now, we haven’t heard a lot about pulling back. We’ve heard some indications of a little tightening. I don’t think we’ve had quite the drop-off that sort of thing as we talked about in the past couple of years albeit we’re at as we mentioned, folks really hadn’t got the refunds in high-end. And in the past few years, we’ve seen some of those drop-offs where they’ve gone through us but I think at this point in time we’ve already been pushed so many deals that we don’t anticipate seeing that quite at the levels that we have before. But I wouldn’t tell you there’s been a dramatic change in the competitor side.

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

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

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

Okay, thanks very much. Sorry.

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

Okay, great. Thanks guys.

Thank you.

Thank you.

And our next question comes from the line of Brian Hollenden with Sidoti. Your line is now open.

Good morning and thanks for taking my questions.

Good morning.

Good morning.

With demand softening, would you anticipate average contract terms to continue to increase or could that contract some?

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

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

I think that several things we’ve got going on internally. And as mentioned it’s some good old fashion hard work and better effective training on customer service. And we have recognized some areas where we could improve there. But yes, it’s internal, more on the training side I would say.

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

Yes, we feel like it could. We are - as the sales price increase the margin percentage is a little less. But we do feel like we have - still have some room to make some additional improvements with inventory management and expense management. And so we are expecting solid gross margin percentages going forward now whether it gets to 42 or not, it’s a little hard to say. But we feel like we’re in a really good spot and we have some more room for improvements.

Thank you.

Thank you.

[Operator Instructions] I’m showing no further questions at this time. So that will conclude today’s Q&A session. I would now like to turn the call back over to Mr. Hank Henderson for any closing remarks.

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

Thank you.

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