Jeffrey Williams - President, CEO, Secretary & Director Vickie Judy - CFO, Principal Accounting Officer & VP, Accounting

John Murphy - Bank of America Merrill Lynch John Rowan - Janney Montgomery Scott Michael Del Grosso - Jefferies LLC Brian Hollenden - Sidoti & Company

Good morning, everyone. Thank you for holding, and welcome to America's Car-Mart's Third Quarter 2018 Conference Call. The topic of this call will be earnings and operating results for the company's fiscal third 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 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, 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 Jeff Williams, the company's Chief Executive Officer and President; and Vickie Judy, Chief Financial Officer. And now, I'd like to turn the call over to the company's Chief Executive Officer, Jeff Williams.

Good morning, and thank you for joining us. As you saw in our press release, we are pleased with the results for the quarter and we are proud of where the company is currently, and we're excited about our future. There are several very favorable fundamental improvements in our numbers, and those improvements are the direct evidence of the hard work and dedication and focus at the ground level by our associates on blocking and tackling and taking care of our customers at the highest levels. Vickie will talk about some specific numbers here in a minute. Our top line growth resulted from a nice increase in sales volume productivity and a slight increase in average selling price. We also saw significant increase in interest income as we grew our receivables base. We believe that continuing top to bottom improvements with our overall inventory management is bringing more potential customers onto our dealerships, and we were able to improve our down payments and deal structure at the same time with better lot level sales execution. We are focused on managing the entire inventory cycle at a much higher level as we move forward. Success in this business starts and ends with providing a quality car at a good price and being great at managing all things inventory. We will continue to push hard for improvements in this critical area. Collections were up, charge-offs were down and we finished the quarter with a significantly lower 30-day plus delinquency percentage. Again, we're very proud of the outstanding efforts of our associates in helping our customers succeed. We have added 3,500 customers for the nine-month period, which is a good indication to us that we're doing a lot of the right things in our customers' eyes. But we know we can always do better, and we will put our full efforts into continuing to improve the customer experience. We have great associates who take pride in their work and have real purpose in helping our customers with their local transportation needs. I will now turn it over to Vickie to go over some numbers. Vickie?

Thank you, Jeff, and good morning, everyone. For the quarter, same-store revenues was up 7.1%. Overall revenues were up to $147 million or 6.1%. This resulted from a 5.7% increase in sales and an 8.7% increase in interest income. Revenues from stores in the over 10 years of age category was up 5%. Stores in the 5 to 10 year category was up 10% to about $25 million and revenues per stores in the less than five years of age category was up about 20% to $25 million. We were very pleased to see an increase in revenues across the board and believe that our improvements in our inventory management processes and our lot level sales execution efforts are paying off. As Jeff mentioned, we will continue to push these initiatives and believe that it all starts with a quality vehicle at a good price, displayed well with great street appeal. We believe this will help us going forward on the revenue side. At quarter end, 30, or 21% of our dealerships were from 0 to 5 years old; 26, or 19% were from 5 to 10 years old; with the remaining 84 being 10 years old or older. Our 10-year-plus lots produced 29.1 units sold per month per lot for the quarter compared to 27.9 for the prior-year quarter. Our lots in the 5- to 10-year category produced 25.3 compared to 23.8 for the prior year quarter. And the lots less than five years of age had productivity of 22.9 compared to 19 for the third quarter of last year. Our average selling price increased slightly to 10,662, a 0.3% or $33 increase compared to the prior year, and also increased $244 sequentially or about 2.3%. This increase is typical for the third quarter. We currently anticipate flat to some slight increasing sales prices for the near term, and we're hopeful that overall market prices will continue to soften compared to prior years and that we will be in a position to put our customers in better cars for the same or less money. Our down payment percentage was 5.5% compared to 4.3% for the prior year. Collections as a percentage of average finance receivables was 12.5% compared to 12.4% last year. Our average originating contract term was 29.5 months compared to 29.4 for the prior year quarter and for the second quarter. Our weighted average contract term for the entire portfolio, including modifications, was 32.4 months, up from 31.9 at this time last year and basically flat sequentially. The weighted average age of the portfolio was 9.3 months, up from 8.9 months for the prior year. For competitive reasons, our term links may continue to increase slightly into the future, but we must always focus on affordability, and the better customers can demand lower and more affordable payments. Interest income was up $1.5 million compared to the prior year quarter due to the $20.6 million increase in average finance receivables, a little over 50% of the increase; and also due to our increase in the interest rate on our contracts to 16.5% from 15%, which began in May of 2016. The weighted average interest rate for all finance receivables at the end of the quarter was approximately 16.2%, up from 15.7% last year at this time. For the third quarter, our gross profit margin was 41.5% of sales, up from 40.8% for the prior year and down from 42% for the second quarter. As discussed, we continue to focus on solid inventory management to improve gross margin percentages. The increase for the quarter over the prior year was primarily a result of better repair and inventory management. For the quarter, SG&A as a percentage of sales was 20.2% or 19.4%, excluding the onetime retirement bonus paid to Hank who retired in December of '17. This compared to 18.7% for the prior year quarter. Excluding this retirement bonus, overall SG&A dollars were up by $2.2 million from the prior year quarter. SG&A as a percentage of revenue was 16.9% versus 16.3% for the prior year quarter. And SG&A as a percentage of customer account was basically flat. As Jeff mentioned, we've added over 3,500 customers since the beginning of the year, and our number of full-time associates per customer has decreased. We've been heavily focused on General Manager recruitment, training and advancement and collection support, along with improvements in our sales and marketing. The increased SG&A relates primarily to these areas. This increase also includes additional bonus and commissions related to the higher net income level as several of our associates, especially our general managers, are compensated on net income. We are intent on making sure our investments are focused on our valued associates and improving our level of service to our customers. For the current quarter, net charge-offs as a percentage of average finance receivables was 7.4%, down from 7.8% from the prior year and down from 7.5% sequentially. The decrease resulted from a lower frequency of losses with severity being basically flat. Our wholesale value recovery rates continue to be under pressure and remained at approximately 22% to 23%. Principal collections as a percentage of average finance receivables for the quarter was 12.5% compared to 12.4% for the prior year quarter. The increase in collections resulted primarily due to the lower delinquencies, the higher average age of receivables and a lower level of modification, offset by a longer average term and the increase in our contract interest rate. This is also in spite of the fact that we had two fewer collection days in the current year quarter. We continue to believe that we're selling a higher-quality vehicle by age with - for slight improvement with age and mileage to a better credit risk customer. We believe 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 continue to improve. Similar to last year, income tax refunds did not begin until mid-February, so it did not have any impact on our sales or collections related to tax time. We are prepared with our inventory and staffing at the ground level as we enter this busy time of year. As mentioned in the press release, we did record the effect of the Tax Cuts and Jobs Act that was passed in December of '17, resulting in a $9.7 million benefit to the tax provision in the current quarter. For fiscal 2018, we expect a blended base rate of approximately 33% and a base rate of approximately 24% in fiscal 2019 and future years. At quarter end, our total debt was $148 million. We had over $51 million in additional availability under our revolving credit facilities. Our current debt-to-equity ratio is 63.1%, and our debt to finance receivables ratio is 29.8%. Our interest expense did increase 422,000 this quarter compared to last year's quarter due to the increase in debt, about 45% of the increase, and also due to the increased interest rates. During the quarter, we repurchased almost 142,000 shares or 2% of our company, at about $43.80 per share. And since 2010, we have repurchased 47% of our company for $182 million at an average price of approximately $33. As always, we are very focused on cash flows. During the first 9 months of this fiscal year, we have added 31 million in receivables, repurchased 26 million of our common stock, funded 1.5 million in net capital expenditures and increased inventory by 8 million, a total of $66.5 million with only a $30 million increase in debt. We believe we are in a great position to grow the business in a healthy, efficient manner, and we'll continue to repurchase shares opportunistically. Now I'll turn it back over to Jeff.

Okay. Thank you, Vickie. As you know, the success of our company is highly dependent on our general managers. This business just does not work without high-quality general managers who are out front serving our customers. The rest of us are here to support their efforts. It takes a special person with a unique set - skill set to be effective in managing a dealership. We are committed to continuing and increasing our investment in recruiting, training and supporting the best possible future general managers, and we are making good strides in this area and we will continue to make this is our number one priority. At the same time, we're recruiting and training new talent, we have opportunities to leverage some of our best performing general managers by increasing the number of customers they serve. We have recently opened three new dealerships under proven existing general managers, and are looking to expand this program as we move forward. We're working hard to make this company the very best it can be and continue the great culture we've had for over 36 years. All the investments we've made over the last few years in our infrastructure are allowing us to now focus on some key growth opportunities as we continue to improve operationally. We believe there is a tremendous demand for what we do, and we believe we are in a unique position to grow and improve our results as we move forward. That would conclude our prepared remarks, and now, we'll take some questions. Operator?

[Operator Instructions]. I would like to reiterate that my earlier comments regarding forward-looking statements apply both to the participants' remarks and to anything that may come up during the Q&A. [Operator Instructions]. And our first question comes from John Murphy with Bank of America.

Maybe just a first question, sort of following up on your last comment there. How are you finding the market for recruiting general managers? I mean - and is it very tight and you're having a tough time finding folks? Or you've seen some sort of loosen up there because, obviously, the human capital is a key part of the potential growth?

Yes. Of course, we use some online sites that are popular and used quite a bit. We were looking for folks' word of mouth. And the labor market is tight, but we've had some pretty good success in getting good candidates into our future manager program. So I think that over the last year, 1.5 years, the quality of candidate we're bringing in and then the training we're supplying to that candidate is much improved, and we've got a good group of new folks in that program now and we've had good success with that effort so far.

Okay. And then second question around tax reform, maybe sort of from two different angles. I mean, first, how do you think it's going to necessarily benefit your customers? And second, does it change any of your capital allocation decisions. Meaning, because tax rates are lower, your after-tax returns would go up, so you might be a little bit more aggressive with store openings in the future, presuming you can find a correct General Manager. So just curious on tax reform from customers and then your cap allocation strategies.

Yes. Our customers are certainly going to have some take-home pay benefits from the Tax Act. And certainly going to - a lot of them are going to receive some additional childcare credit. So I think net-net, it's going to be a pretty nice positive for our customers. It is a big benefit for the company, obviously, to the tune of maybe $5 million a year unless income tax expense. So it certainly does allow us to invest in share repurchases or any dealerships or expanding the customers served by existing dealers, certainly continuing to invest more effort in that General Manager recruitment development advancement area. So it's a big positive for the company, and we're going to do some good things with that additional cash.

But there's no specific plans right now? It's sort of - it will be opportunistic redeployment, is that correct?

Yes. I think the big - capital has never been the limiting factor for us in terms of opening new dealerships. It's always about finding a quality person to manage that dealership since we're so decentralized, and it really requires a special skill set, a special person to run the dealership. So we've not been limited from capital in terms of opening dealerships. It's more about finding that talent. So if we had 30 people ready to go with new dealerships now, we'd be out there doing it already. So it's really for us getting a good candidate and getting them trained up and then supporting them once we get the keys to the dealership.

Got you. And then just lastly, I wonder if you could comment sort of on supply in the market, I mean, and what you're seeing as far as some of the surges that might be coming down from the 0 to 5 year-old segment into sort of more of your sweet spot. Really, what you think is going on out there in supply of the market as well as pricing of the vehicles?

Yes. I think, generally, the environment for us on the buying side has been very good. The last several months, we did get a little bit of a spike with the hurricanes with cost and a little spike here during tax time. But we've really had no issues finding good quality cars for good, prices. And we do expect some continuing softening after tax time, which allows us to buy a better car for the same money and put our car - put our customers in a better car. So we're very optimistic about the supply side, and I think it's only going to get better over time.

Our next question comes from John Rowan with Janney.

Just maybe a follow-up on the last question. There's no specific plans with the Tax Cut to raise wages or give out any type of special employee bonus, is there?

Well, a lot of our employees, especially the general managers, are compensated as a percentage of net income generated at their dealerships. So all of our general managers are going to be getting a nice raise. And each dollar they make pretax, more of that dollar's going to go into their pockets. So this is going to be a nice benefit for them individually, but the greater aspect of this is what it means to them as they grow their business and grow their profits. So yes, we're going to plow some of these money into wages, especially at the GM level. And of course, we are always looking to make sure that our offering is competitive in all spots within the company. And this - as you know, there is some wage inflation out there, and we're going to keep up with that and get the best associates in our company.

Okay. As far as competition goes, I was happy to see a rise in the down payment. We have seen some other sub-prime companies that deal with more end-of-life assets, the quick stop lending. Another one of your buy here, pay here peers recently posted a very significant increase in losses. Do you think there's a start of a title shift in the space? It just, to me, it seems like we are hearing more stories of portfolios up for sale and companies that are stuck in investments in auto lenders. Give me an idea of what inning you think we're in when the recovery starts and we get back to a more rational market.

No. It's hard to say. We kind of made the decision five years ago that this was the permanent environment, and we're going to do well in this environment. But it has certainly loosened up or gotten better for us, and we think that just by sticking with our guns and blocking and tackling and getting out there and servicing these customers, that at the end of the day, we're going to be in a great spot. There's still quite a bit of money out there. The interest rates on securitizations are lower than they were 1.5 years ago even though rates have gone up, so - but there is less money out there, no doubt about that. And for the customer we serve, we think that things only get better from here. It's hard to know how much.

Okay. But staying with that topic a little bit, I did notice in the press release you said that the cash collection, relative to gross receivables, actually improved. I mean, when was the last time we saw an improvement in that ratio? Because I feel like it's been a very long time. Obviously, as the increased duration of the loans, that, that ratio has deteriorated. Maybe give me an idea of how long it's been since you've actually started to see that cash collection figure improve.

Yes, I don't have that. I should have that. I don't have that in front of me, John. But it's been a couple of years, I think.

5 to 6 quarters, yes.

Okay. And then just last question. 4Q tax rate?

The fourth quarter tax rate should be right around that 33% to start with. And then, of course, the new way the option exercises can affect the rate could affect that. But otherwise, the base rate will be that 33%.

[Operator Instructions]. Our next question comes from Mike Del Grosso with Jefferies.

Most of my - or my questions have been asked and answered.

Our next question comes from Brian Hollenden with Sidoti.

So how sustainable is the 7% same-store sales growth? Have you seen any material decline in competition? Or is your same-store sale increase all driven by internal improvements?

Yes. I would say most of it is internal improvements. We're doing a much better job, as we mentioned, on inventory management. And so I think - and most of it is internal sales execution is better. We're more focused on getting a lot of traffic and closure rates and test drives and all that blocking and tackling at the lot level. So I think it's - most of it's going to be related to us internally. It was a nice increase volume-wise, but it was still only 27 units per month per dealership. So that's - to us, we've got upside on volumes. That was a good improvement. But our expectations as we move forward are higher than that.

So just following up on the inventory improvements. Are they primarily - are the inventory purchase decisions happening at the corporate level now? Or are you just able to buy a better-quality vehicle at the same price compared to, say, a year ago?

Yes. Some of it is external to our company, with the supply of product coming down into our market certainly is better. When credit tightens up above us, so that certainly helps. But the more important aspect is just our internal efforts on really buying a good car for a good price, accountability at the lot level. We don't have a corporate purchasing department. Our purchasing agents work for our managers in the field, and there's a lot of accountability with that. And we've really stepped up the accountability right there at that ground level between that GM and the person supplying him or her that car. And so that's really had a good effect on us too.

And then just in terms of SG&A, at what level and for how long should we expect SG&A to remain elevated?

So there's going to be some continuing investment, obviously, in our general manager program, in our collections support. It will probably remain elevated here for a few quarters until we can start leveraging that top line.

But I would say, long-term, we do expect all these investments to result in some leveraging. It's just hard to, when you've gone through the changes in the industry and the company changes and you're investing in these areas, it's a little hard to pinpoint exactly when leverage is going to occur. But what we're doing is building a pretty strong base here to drill volumes from, and sometimes, we just don't know quite how that timing works out.

All right. And last one for me. Is there a certain price where you wouldn't buy back shares in the quarter?

Well, we have internal analysis in price points, where we're in and when we were out. So yes, there are prices we wouldn't.

At this time, I'm showing no further questions. I'd like to turn the call back over to Mr. Jeff Williams for closing remarks.

Okay. Well, we appreciate you joining us this morning. I appreciate your interest in America's Car-Mart. And I'd like to thank all of our associates out there that have dedicated their lives to serving our customers and making our company great. So thank you, and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.