Hank Henderson - Chief Executive Officer Jeff Williams - President

Vincent Caintic - Stephens John Rowan - Janney John Hecht - Jefferies Brian Hollenden - Sidoti

Good morning, everyone. Thank you for holding and welcome to the America’s Car-Mart Second Quarter 2018 Conference Call. The topic of this call will be the earnings and operating results for the company’s fiscal second quarter 2018. Before we begin, I would like to remind everyone that this call is being recorded and will be available for replay for the next 30 days. The dial-in number and access information are included in last night’s press release, which can be found on America’s Car-Mart’s website at www.car-mart.com. As you all know, some of management’s comments today may include forward-looking statements, which inherently involve risks and uncertainties that could cause actual results to differ materially from management’s present view. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The company cannot guarantee the accuracy of any forecast or estimates 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, 2017 and its current and quarterly reports furnished to or filed with the Securities and Exchange Commission on Forms 8-K and 10-Q. Participating on the call this morning are Hank Henderson, the company’s Chief Executive Officer and Jeff Williams, President. And now I would like to turn the call over to the company’s Chief Executive Officer, Hank Henderson.

Good morning and thank you all for joining us. Overall, we are pleased with our results for the quarter, with net earnings of $6 million for the quarter compared with $5 million for the same time last year, which is $0.79 per share, up from $0.62 per share. Sales volume on a per store basis was relatively flat, but with some store closures, revenue was down a bit and Jeff will provide the details on that in just a moment. Revenue was also slightly effective as we saw a decrease on our average retail sales price of $0.73. We actually consider that reduction to be a positive with as we are as always working to keep our vehicles affordable for our customers. To help assure our customer success, the quality vehicle is critical, but it’s also imperative that we keep the transaction in a range that will equate to a payment that will fit our customer’s budget without having impractical term length or down payment expectations that are unrealistic. We are seeing good success in our efforts to reduce repair expenses through improved inventory quality, more efficient purchasing of parts and better overall management of inventory levels and repair practices and that is reflected in an improvement in our gross margins, which was 42%, up from 41.4% for last year. We also saw some movement in the right direction on collections as well with losses as a percentage of accounts receivable at 7.5%, down from 7.7% last year and we ended the quarter in better shape as our over 30-day delinquencies were at 4.1% compared to 4.8%. While we would have liked seeing a bit of an increase with our sales overall, we are pleased with our results for the quarter as we saw solid improvements in the other key areas of our business and with each of those contributing to increases in our bottom line. So, I am going to go ahead and turn it over to Jeff now to give some more details on our recent results.

Thank you, Hank. For the quarter, same-store revenues, was up slightly 0.6%. We did, however, see a 0.7% overall decrease in revenues, which resulted from a 2.1% decrease in sales offset by 9.7% increase in interest income. The overall decrease in sales related to the effect of the 8 dealerships that have been closed since last year. Revenues from stores in the 10 plus year age category, was down 1%. Stores in the 5-year to 10-year age category was up 2% to about $25 million and revenues for stores in the less than 5-year age category was up about 6% to $27 million for the quarter. We continue to push several initiatives, especially continuing efforts with inventory improvements, good cars, good prices, with a good display at our dealerships. We believe these will help us going forward on the revenue side. We will also continue to improve lot level execution through training and support, better prospecting and also continue our efforts to improve our website and social media all in an effort to increase quality traffic and sales closure rates at our dealership. At the end of the quarter, 31% or 22% of our dealerships were from 0 to 5 years old, 26 are 19% are from 5 to 10 years old, with the remaining 83 dealerships being 10 years old or older. Our 10-year plus lots produced 30.3 units sold per month per lot for the quarter compared to 30.7 for the prior year. Our lots in the 5 to 10-year category produced 26.8 compared to 26.7 and our lots in the less than 5-year category produced 24.8 compared to 23.5 for the second quarter of last year. We do have some inconsistencies between dealerships, especially as related to our inventory processes, which is contributing to some discrepancies and productivity between dealerships. We do have room for improvement, but we are making some progress. Our average selling price decreased slightly to 10,418, 0.7% or $73 compared to the prior year, but increased $32 or 0.3% sequentially. The flattening out of our sales price has been expected and we are working hard to find higher quality vehicles for our customers at good prices. We currently anticipate flat to some very minor increasing overall sales prices for the near-term and we are hopeful that prices will continue to soften compared to prior years which will put us in a position to give our customers better cars for the same or less money. The hurricanes may have had some minor effect on supply and prices for a few weeks, but really did not have much of an impact on us. Our guys did a good job of staying out of the market temporarily and not overpaying for cars. Once again decreasing car prices can actually be a good thing for us and doesn’t necessarily mean that our overall selling prices would go down. Our down payment percentage was 5.8% compared to 5.6%. Collections as a percentage of average finance receivables was 12.2% compared to 12.6%. Our average initial originating contract term was 29.4 months compared to 29.1 months for the prior year quarter and down from 29.8 months from the first quarter. Our weighted average contract term for the entire portfolio, including modifications was 32.5 months, which was up from 31.7 months at this time last year and basically flat sequentially. The weighted average age of the portfolio was 9.1 months, up quite a bit from 8.5 months at this time last year. For competitive reasons, our term length may continue to increase just a little into the future, but we must always focus on affordability and better customers can and do demand lower, more affordable payments. Interest income was up $1.7 million compared to the prior year quarter due to the $21 million increase in average finance receivables that was about half of the increase and to our increase in the interest rate on our contracts, which went to 16.5% from 15% beginning in May of 2016. The weighted average interest rate for all finance receivables at the end of the quarter was approximately 16.1%, that’s up from 15.5% at this time last year. For the second quarter, our gross profit margin percentage was 42% of sales, that’s up from 41.4% for the prior year and up from 41.4% for the first quarter. Our continuing focus in the solid inventory management has resulted in improved gross margin percentages. We are pleased with our continuing efforts to improve the quality of our inventory and improve inventory turns and efficiencies and these efforts are having a positive effect and will continue to benefit us as we move forward. We will remain aggressive with our inventory expense management. For the quarter, SG&A as a percentage of sales was 18.2% compared to 17%. Overall, SG&A dollars were up about $1.1 million from the prior year quarter. SG&A as a percentage of revenues was up to $15.9 million from $15.1 million and SG&A as a percentage of finance receivables was basically flat with the prior year at about 4.8%. We have added 3,100 customers since the beginning of the year. As we have discussed, we continue to make additional investments in GM recruitment, training and advancement, collection support and sales and marketing and our increased SG&A relates to these areas. Our plan is to leverage these investments over time as we grow the top line with increased productivity from existing dealerships and over the near-term, some strategic new lot openings to take advantage of market and talent opportunities. We will always watch our costs and we will be very frugal, but we will ensure that we have an infrastructure to support our value to customers at the highest levels. For the current quarter, net charge-offs as a percentage of average finance receivables were 7.5%, down from 7.7% for the prior year quarter and up from 6.4% sequentially due to seasonality. The decrease resulted from a lower frequency of losses with severity being flat. Excluding the 8 dealerships that are closed and winding down, net charge-offs as a percentage of average finance receivables would have been 7.4% for the current quarter. So, we basically saw a 30 basis point improvement for the quarter in net charge-offs. Our wholesale value recovery rates continue to come under pressure, but have leveled off for the last several quarters, our recovery rates once again were in that 22% to 23% range. Principle collections as a percentage of average finance receivables for the quarter was 12.2% compared to 12.6% for the prior year. The decrease resulted mostly from the longer average term and the increase in our contract interest rate offset by slightly higher average age of receivable. The lower collections percentage from the longer term resulted in about a 40 basis point increase in the provision for credit losses on the income statement as we reserve a 25% of uncollected receivables. Between the effect of the closed dealerships and the lower collections for the reasons mentioned, credit losses would have been about 60 basis points lower for the quarter. We continue to believe that we are selling a higher quality vehicle, slight improvements with age and mileage to a better credit risk customer. We believe that our customer service levels are continuing to improve and when combined with us providing our customers affordable dependable vehicles, we expect losses and customer success rates to improve. At the end of October, our total debt was $138 million and we had almost $60 million in additional availability under our revolving credit facility. Our current debt to equity is 60.8% and our debt to finance receivables is 28%. We have significant room to grow and there is a lot of demand in the markets we serve. We know we can improve results and consistencies with our existing dealerships and we are recruiting, training and supporting our future general managers at a much higher level. We repurchased 407,000 shares or about 5.4% of our company at an average price of about $40 for the quarter and we have now repurchased right at 46% of our company for $175 million since 2010 at an average price of about 33. In October, we amended our debt agreement to reset available share repurchases for additional $50 million and a slight reduction in our interest rate. Additionally, our Board has reauthorized an additional 1 million shares for repurchase. It is a very exciting time at Car-Mart and our plan is to grow the business in a healthy efficient manner and to continue to repurchase shares opportunistically. Now, I will turn it back over to Hank.

Thanks, Jeff. Well, as Jeff said, our plan is to continue to grow the business in a healthy efficient manner. We have a lot of capacity within our existing store base to increase sales and also a lot of opportunity to grow the bottom line of many stores with simple better execution. We will also continue to open stores on a selective basis as we are confident we have the proper support in the area. And as a prime example, we are opening a new store in Centerton, Arkansas, which is right here on the backyard in the Northwest Arkansas, we must say we were based out of and this area has been one of the fastest growing in the country with over 0.5 million people in this corner of our state and we needed another location to better serve the area. And actually, that store is opening Monday and that will put us at 141 stores. And we will continue to look for other similar opportunities, these in areas, particularly where our strongest, experienced general managers can help provide additional oversight and support to help assure the best possible opportunity for success. So, for the past 3 days here, we have had all of our area operations managers and our regional operations VPs with us here in Bentonville for some training, retraining, team building and most importantly for the time to pull everyone together to assure the whole team has the same shared focus on the right things. And everyone together has been a great reminder of what’s an excellent group of folks we have. The dedication, commitment and passion this group has for customers and our associates, is very, very impressive. The team is incredibly enthusiastic about the future of our company and the opportunities that lie ahead and we are very fortunate to have such great people. Also as you saw in our press release, we have named Vickie Judy as our new CFO, effective January 1. Vickie has been with us for the past 7 years, most recently serving as our Principal Accounting Officer. So, she already has a very thorough understanding of our business and certainly the respect of everyone here. And this will obviously make for a very smooth, seamless transition. We are excited for Vickie and for the company as she takes on her new role. So, that concludes our prepared remarks. And now, we would like to move on to your questions. Operator?

At this time, the participants will now answer questions from the callers. I would like to reiterate that my earlier comments regarding forward-looking statements apply to both the participants’ prepared remarks and to anything that may come up during the Q&A. [Operator Instructions] And I am showing we have a question from the line of Vincent Caintic from Stephens. Your line is open.

Hey, thanks. Good morning. Thanks guys. So, two questions. First, so you spent time talking about training up your general managers and getting the bench filled. And just curious you now have new store in Centerton. If you have had the amount of general managers that you need to trained up, what’s the growth opportunity like how many stores would you have and maybe what’s the trajectory to that growth from here?

Well that is the single factor that prevents us from adding a whole bunch of dealerships. It’s just the talent at the GM spot. So, for several years, we were adding 10 to 12 dealerships a year and with the change in the industry decided that we need to pull back and take another look the growth plans and that’s kind of where we are at now is we have got a good group of general managers, a lot of them are still make some seasoning and we are working hard to bring them up and train them up, but at the same time we do see some opportunities to leverage some of our existing manager talent at locations in some growing areas. So, I guess the answer to your question we don’t quite know yet, but we are working very hard to get that bench filled up and when we get to a point where we have somebody on the bench that’s ready for the keys to a dealership. We will be shy at all about opening dealerships, when we have somebody ready trained up, experienced in winning a dealership of their own.

I would add there is no shortage of talents out there for us. So, when we look at what – actually, if you look on our investor presentation we have to show what we have now then there is more identified. We are at 141 now and we could be at 200 without really stepping for outside of our footprint. So, it’s all a people thing for us.

But we will not be opening dealerships without really quality folks with their name on that front door and that’s what we are looking so hard at right now and we are making some good progress.

Okay, great. That’s very helpful. Thank you. The second question I have just on the used car sales environment generally, so you have had your sales some improvement there, but maybe if you could talk about the competitive environment here. I think the industry or at least some of the industry reports I see is calling for used car sales generally be declining over the next year or so, but now if you are seeing that kind of there is any increased competition out there? Thanks.

Not really any increased competition if anything maybe it’s just a little bit more friendly for us on the sales side, there is just plenty of demand out there for folks looking for good basic affordable transportation and we just see it like if we keep executing and you get the right product out front that our sales will be fun.

Okay, great. Thanks very much.

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

Good morning guys.

Good morning.

Good morning.

Jeff, you said your company raised like 22% to 23% effectively flat. I mean, what needs to change the market in general to get back of that, if I am not mistaken it’s historically been in the 30% range. I mean what kind of big levers have to move to kind of revert to a more normalized environment?

Well, the main driver of the reduction is just the fact that the cars at the end of life, there are just so many cars out there, a 10-year-old Ford Taurus or 12-year-old Taurus is just – is really not worth much at a recovery point. So I think the offsets to that would be for us making sure we are buying a really good solid mechanically sound car at a good price and putting our customers in that car and increasing the chance of success. So, the main driver of that is going to be how we handle customers and customer situations after the sale in putting them in a better car to start with. We don’t have much influence or can’t have much effect on the value of a car at end of life through so many factors that go into that, that are outside of our control. We have been able to adjust our business and kind of plough right through that issue. We have been addressing this for a couple of year now. So, we are hopeful that recovery percentages go up, but we are not counting on that, we are certainly not building that into anything as far as our plans going forward.

So, I mean – can you remind me again if there was any influence on the recovery rates bases on metal pricing or if it’s also kind of maybe there is a permanent impairment in the overall recovery rate given the increased duration, I mean whether or not that sticks around as competition changes?

Yes. I think there could be an argument that the scrap prices do set a floor for car, but to your point, the longer terms in the flood of just old basic cars out in the market, the repos and the trades and we maybe permanently low 20s on the recovery.

Okay. And just last question, Jeff I think you mentioned something about a computer problem or maybe it sounded off like a point-of-sale issue. I wasn’t sure that I understood your comment earlier in the prepared remarks. Can you maybe just review what you are talking about as far as having improvements to go in your processes and the dealerships?

We are working hard to have good cars at good prices and properly displayed out front to track the customer at the street level. We are also working hard on training and support with our sales associates in the field, better prospecting. We have got database with several hundred thousand customers or past customers that we are prospecting more heavily and more efficiently than we have in the past, still working on that effort and then we are working on our webpage and in social media at the same time, all in an effort to attract a better customer and increase lot traffic.

Okay. So I was just – there was no type of technical system outage. I just want to make sure I thought I heard that, but I just wanted to double check. Okay, thank you very much. That’s all from me.

And our next question comes from the line of John Hecht from Jefferies. Your line is now open.

Good morning, guys. Thanks very much.

Good morning.

Good morning. First question is I know you guys there is a change in I guess accounting for non kind of cash oriented income, what’s the proper tax rate for you guys going forward to model in?

Got it. It’s still about that 37.3 absent any effect from this accounting change. This is something that is going to have some effect on us going forward, but it’s really almost impossible to calculate in as far as the rate, it’s based on excess tax benefits from stock option exercises. Those excess benefits used to just run through the balance sheet. Now, they are running through the income statement. So, it’s all based on what options are out there, when they get exercised and but the starting point for us is effective rate would still be there at 37.3.

Okay. And then Jeff you talked about you guys avoided issues with respect to the hurricane and inventory costs and even maybe inventory costs would continue to drift a little lower. Should we think about that as lower wholesale – lower inventory costs, consistent gross margins, but lower overall your average sales prices or how should we think about your gross margin, your average sales price given your outlook on inventory costs?

Well, in our business, what we would like to do when costs decrease, when inventory costs go down, we would like to use that as an opportunity to put our customer in a better color for the same money. So, we did see a slight reduction for the quarter in the sales price, but going forward, we would really like to keep that sales price about where it is or even a little bit up, but put our customer in a much better mechanically sound cohort to take advantage of our purchasing strengths.

And so generally speaking are you – I guess it sounds like your position is relatively positive on the opportunity to continue to buy good cars at relatively low and maybe even decrease in prices?

As we saw the prices stay relatively flat, but we actually – and it was mentioned our average year model and average models improved a little bit through this past year. So, instead of going down cost curve at this point, we are able to provide a little bit better car for the same dollar.

Okay. And then Jeff you gave us a bit tax or statistics around the different vintages, it seems like is there anything in the 5 to 8 year vintage that is in a geographical thing or is there anything in the 5 to 8 year vintage that you are focused order to kind of reverse the sales trends there or is that just sort of where it kind of gets an idiosyncratic issue with that group?

Yes, it’s just kind of been a little bit spotty as far as consistency between some of the older dealerships. We are working on getting a little better on inventory management what anything has really jumped out it was kind of the entire category was down just a little bit. We are pretty positive on the outlook for sales volumes going forward for that group of dealerships. We have had some inconsistencies with inventory and we are working on that and we do expect to see some improvements down the road.

Great, guys. Thank you very much.

Thank you, John.

[Operator Instructions] And our next question comes from the line of Brian Hollenden from Sidoti. Your line is now open.

Hi, thanks for taking my call. With your significant share backs in the quarter, can you talk more broadly about your capital allocation strategy in terms of continued repurchases and any possible dividend and then just debt pay down? Thanks.

Yes, Brian, we have been since 2010, we have been very aggressive and we are comfortable with where we are at cash flow wise, we are comfortable that we have worked through these significant changes in the industry and very happy with our cash flows. And basically, we feel just comfortable with a little more leverage on the balance sheet and feel like for the long-term, our shares – it’s a good value long-term for the shares we bought and the prices we paid. We once again if growth opportunities are out there for us that would be – our first priority for capital allocation would be to put that money out there and grow the base business where it makes sense. So, that’s our first priority is to grow a healthy business and grow customer account, grow receivables, grow profits from the base business. Secondarily, we look to share repurchases. And we have been able to have our cake and eat it too and feel comfortable with the business, the leverage ratios and just we are comfortable with a little more leverage and don’t think that will get in a way of us taking advantage of business and market opportunities as we go forward.

Thank you. Does the higher customer interest rate deter potential sales?

No, we looked hard at that. We didn’t make that change back in May of ‘16. We didn’t make that change lightly and it was all about credit losses being higher and us trying to offset higher credit losses on the risk side. But that really ended up at about $8 to $10 a month on an average payment and we are not missing any sales for $8 to $10 a month. And as the market gets a little tighter on the competitive side, I am not – I don’t even know that we are $8 to $10 bucks higher now we were at the time, but I think competitive offerings maybe creep up us now, so it’s really not much of a negative at all.

Yes, it’s still actually competitive right, a lot of what we see from some of the indirect to our customers have gone and come back. They have actually – they have been in the heart right, so the rate is still competitive at that level.

And then last one from me, are you seeing wage inflation on the general manager side and then maybe you could just tell us a little bit, what’s the turnover like of general managers? Thanks.

Yes, there is general wage pressure kind of all over the place. One advantage we have is a retailer, there has been some disruption in the bricks and mortar retailer world out there, so that does give us a little advantage on the wage side, but generally I think about two-thirds of our cost is wage-related. We are a people business, it’s all about people and then – and two-thirds of our costs are people costs. So, we are very aware of wages and wage pressures but at the same token that does mean our customers are making more wages too. So, it’s not all bad for us and we do have to get – we do have to be more productive in the way we offset wage increases is to be – to have higher productivity levels and that is really what we are focused on, but there is some general wage pressures company wide, not just at the General Manager rank and we are trying to address that and make sure that what we are offer is competitive and we get the best people in here to serve our customers.

Thank you.

Thank you. And at this time I am showing no further questions.

Alright. Well, thank you all for joining us. We don’t have any further comments. I think we are all covered up for the day. So, we will get back to work and the plan is to continue to bring some more good news next time. So, thank you all. Have a great day.

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