Jeff Williams - President and CEO Vickie Judy - CFO

John Rowan - Janney Vincent Caintic - Stephens Kyle Joseph - Jefferies

Good morning, everyone. Thank you for holding, and welcome to America's Car-Mart's First Quarter 2019 Conference Call. The topic of this call will be the earnings and operating results for the Company's first quarter for fiscal 2019. 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, 2018, 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 would like to turn the call over to the Company’s Chief Executive Officer, Jeff Williams.

Thank you for joining us. We thank you for your interest in America's Car-Mart. As we said in the press release, it’s nice to see our hard work translate into solid top and bottom line results for the quarter. Vickie will get into the numbers in just a minute, but I wanted to take a couple -- talk about a couple of things that we’re especially proud of. We’ve been around 37 years this month and we’ve always had great associates taking care of our customers, now numbering almost 73,000. That’s up almost 4,000 customers in the last year, and we believe it’s a testament to the value we are adding to the markets we serve. We have a lot of work to do and can always improve on our service levels, but we’re proud of the progress being made and the commitments of our associates to continue on the improvement. Everyone at Car-Mart is pushing to get better every day and we’re very proud of that. As for the numbers, it was nice to see the decrease in our overall average contract term especially with a higher sales price and the corresponding increase in collections, which will put more of our customers in a position to succeed on our individual contracts. We have always focused on putting our customers and transactions that make economic sense for them individually and to see this movement is a real positive. Additionally, we had a strong quarter in terms of cash flows, by always focusing on cash flows, we’ll be in a position to continue to invest in our business and step up our game to provide better services for our customers. I’ll now turn it over to Vickie to go over some numbers. Vickie?

Good morning. For the quarter, overall revenues were $164 million with the same-store revenues up 12.1%. This resulted from a 12.3% increase in sales and a 9.8% increase in interest income. Revenues from the stores and the over 10 years of age category was up 11%. Stores in the five to 10 year category, was up 11% to about 33 million, and revenues for stores in the less than five years of age category was up about 34% to 24 million. Traffic in our dealerships has increased and we have kept our focus on having a good mix and volume of vehicles on our lots to meet customer needs. Our average selling price increased to $11,015 or 6.1% or $629 compared to the prior year quarter, and an increase of $93 sequentially. This increase results from selling a larger volume of the higher dollar vehicles including SUVs and trucks to meet customer demand also coupled with an increase in overall vehicle purchase price costs, which in terms is also in higher selling prices. The average age in mileage of the vehicles sold this quarter were both slightly improved compared to the prior year quarter as we work hard to improve the quality of our inventory. We currently anticipate flat to some slight increases in sales prices for the near term and we’re hopeful that overall market process will soften compared to prior years. Our goal is to be able to put customers in better cars for the same money. At quarter end, 24% or 17% of our dealerships were from zero to five years old, 33% or 24% were from 5 to 10 years old and the remaining 83 dealerships were 10 years old or older. Our overall productivity increased to 29.8% from 28.2% in the prior year first quarter, almost 6% increase. Our 10-year-plus lots produced 32.4 units sold per month per lot for the quarter, compared to 30.6 for the prior year quarter. Our lots in the 5 to 10 year category produced 26.1 compared to 25.3 for the prior year, and the lots less than five years of age had productivity at 26.2 compared to 23.8 for the first quarter of last year. Our down payment percentage was essentially flat compared to the prior year quarter, collections however, as a percentage of average finance receivables were 13.1% compared to 12.4% last year. Our average originating contract term was down slightly, but even with the $629 increase in the average selling price at 29.7 months compared to 29.8 months for the prior year quarter and down from 30 months for the fourth quarter of fiscal ’18. Our weighted average contract term for the entire portfolio including modifications with 32.4 months for the first quarter compared to 32.6 months for the prior year. The weighted average age of the portfolio was flat at 8.9 months. We believe our improvement in collections is a result of being better in our daily processes of calling and visiting customers in tandem with them having a little more cash in their pockets due to tax reform, increased employment and wage increases. Interest income was up 1.8 million compared to the prior year due to the 36.7 million increase in average finance receivable little over 80% of the increase and also due to our increase in interest rate on our contract to 16.5% from 15%, which began in May of '16. The weighted average interest rate for all finance receivables at the end of the quarter was approximately 16.3% up from 16% actualized 17%. For the first quarter, our gross profit margin was 41.6% of sales up from 41.4% for the prior quarter -- prior year quarter and up from 40.6% for the fourth quarter of fiscal ’18. This increase was primarily a result of better wholesale management, decreased repair costs and lower PPP claims, partially offset by a decrease as a result of the higher average selling price, as our margin percentages are lower at a higher selling price. For the quarter, SG&A as a percentage of sales was 8.3% compared to 18.6% for the prior year quarter. Overall SG&A dollars were up 2.5 million from the prior year quarter. SG&A as a percentage of customer count was up slightly. We’ve added over 4,000 customers since this time last year. The majority of the increase in the SG&A is related to payroll and benefit as we continue to invest in our associates as we try and develop and recruit to provide excellent customer service. This does include additional bonus and commissions related to the higher net income levels of several of our associates especially the general managers are compensated on net income. Stock based compensation expense was also higher this quarter compared to prior year. For the current quarter, net charge off as a percentage of average finance receivables was 6.4% flat compared to the prior year quarter. We did experience an increase frequency of losses however severity was down due to improvements in collections and slightly higher recovery rate. Our wholesale value recovery rates continue to be under pressure, but did increase slightly for this quarter to approximately 24%. Again, principal collections as a percentage of average finance receivables for the quarter was 13.1% compared to 12.4% for the prior year. Our effective income tax rate was 17% versus 36% in the prior year. This decrease is a result of tax reform, a reduction in our base effective rate from 37% to 24% and an income tax benefit from the stock option exercises, 943,000 in the current year versus a 172,000 in the prior year. We expect our base effective tax rate to be approximately 24% going forward, prior to any excess tax benefits from stock option exercises. At quarter end our debt was a $155 million and we had over $44 million an additional availability under our revolving credit facilities. Our current debt to equity ratio is 65.2% and our debt to finance receivables ratio is 29.8%. Interest expense increased 632,000 this quarter compared to last year due to the increase in debt, which was about 60% of the increase and also due to increased interest rate. During the quarter, we repurchased almost 116,000 shares or 1.7% of our company for $7.4 million at an average of $63.59 per share. Since 2010, we have repurchased almost 51% of our Company for $205 million at an average price of approximately $35. We continue to have strong cash flows, during the quarter, we added $19 million in receivables, repurchase 7.4 million of common stock, funded 685,000 in net capital expenditures and increased inventory by $3.9 million. The total of $31 million with a only a $2.8 million increase in debt. As Jeff mentioned, with the strong cash-on-cash returns, we are in a position that we’re able to grow the business as we develop talented and experienced managers and we will continue to repurchase shares opportunistically. Thank you and I’ll turn it back to Jeff.

Thank you, Vickie. As you know, the market we serve is very large, and we believe that most every town can benefit from having a Car-Mart. We offer a higher level of personalize service for local transportation needs. We will continue to invest in our business especially in the general manager recruitment, training and advancement program with emphasis on inventory management from top to bottom. This business starts and ends with providing our customers with quality vehicles at affordable prices. As we discussed our future manager benches is getting stronger, and we’re excited to see so many passionate people take advantage of the unique carrier opportunity that Car-Mart provides. We have several newer general managers with significant long-term potential and we’re excited to watch them grow as leaders in the coming years. Since our last call, we have opened dealership in prior Oklahoma, and in Fayetteville, Arkansas. Additionally, we have three new auto openings in process, Bixby, Oklahoma, Montgomery, Alabama and Conway, Arkansas. These dealerships will be managed by some of our top performing general managers, as we look to expand the number of customers served by these managers to leverage the talents of our proven leaders. I’d like to thank our associates for their hard work and dedication to this effort. And again, thank you for your interest in Car-Mart. Now, we’ll open up for questions. Operator?

[Operator Instructions] Our first question comes from John Rowan with Janney. Your line is now open.

So I believe you guys said in the prepared remarks, something about lower gross profit margin and more expensive cars, and I was just wondering, I mean you’re pretty close to that historical 42% rate. Is there any possibility that we actually get back to that 42% rate? Or is this -- was a 41.6% a high watermark?

Well, we continue to try to buy the best car we can for the money, I mean I think we’re getting close to where we are going to stay. I don’t expect any more large increases in the gross profit. It’s about every day to keep repair costs down, obviously on the cars that we’re purchasing, but -- so I don’t see a lot of change in that gross profit margin.

And then, can you give us an idea, obviously, there’s an increase in the lot level productivity per month. Can you remind me where was the kind of the high watermark on that number? If I am not mistaken, I saw -- everyone is kind of look -- you guys were talking about numbers well in excess of 30 units per month per lot. Where has that number been? Where do you target that number getting to -- in past calls you guys have talked about that being really the focal point of being able to lever your infrastructure and create much better financial returns?

Yes, there’ve been points in our past where we’ve been over 30 as far as productivity and with the efforts we are putting into recruiting and training and supporting the general managers. We certainly feel like we’ve got room to grow as far as productivity. The dealerships we’ve added in the last several years certainly have capacity to continue to grow. Some of that's a function of new lot openings also, so -- but I think we have capacity and we have folks in the field that could certainly handle more than 30 cars per month per lot as we go forward.

And just two more quick questions your debt is all floating rate, correct?

Yes, it is.

And there’s not much -- is there a lot of ability for you to pass along higher rates to the consumers? I was -- you had mentioned something about it in the prepared remarks that I had always been under the assumption that the vast majority of your contracts are at state maximums?

We do have room in several of our states and Arkansas where a large portion of our dealerships are -- we are bumping up against to the state maximum. There’s some room there and we’re below market in some of those. So right at the time, we don’t have any plans to increase that. It’s always a balance of making that affordable for our customers.

And when customers compare rates, the better customers do look at our 16.5% as something that makes our offering look a little better.

And just one last question, cash collection cycle obviously better, down payment flat and charge off flat obviously there’s two moving parts in that charge off, higher frequency, lower severity. Is the only thing that’s driving the better cash collection, the lower duration? Or is it also they’re actually getting even though you’ve flat down payments, you’re actually getting more cash upfront because the sales prices higher? I am trying to parse out what's really driving that faster cash collection cycle? And that’s it for me.

Well, it does relate to a shorter overall term and that not much, it is a little shorter. And then I think more than anything, it’s just good solid blocking and tackling on the collection side of the business in the field. We’re just being more efficient with collections and more focused on that, and just basically getting better at it as we go forward.

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

Given all the positive trends we saw in the quarter, both in terms of sales, margins, as well as credit. Can you just give us an overview of a competitive factor in the quarter and whether that was the driver or whether it’s the -- sort of the health of the underlying consumer or is the combination of two?

I think maybe the competitive environment is maybe a little bit more friendly that was six months ago, nine months ago a year ago. I think the consumer maybe does have a little more, free cash and more cash in the pocket. But we believe more than anything most of the positive changes is internal. We really focused on the basic blocking tackling of the business, accountability, and everyone here is really working hard to improve. So I think that the better results by and large due to us just operating at a higher level at this point, but we are gaining some benefit outside of the company, its hard to know exactly how much of each is driving the results, but we believe that the biggest factor is, is we are operating better and we’ve got a lot of room to improve from where we’re at now.

And then just shifting to used car prices, obviously, they have been pretty strong, when you look at NADA or JD Power. But just give us your sort of outlook there and thoughts on the impacts on that margin as well as your credit performance?

Yes, as you say car prices are pretty stable to increasing and especially for the car that we’re looking for. But I would say, compared to a year ago, the environment might be just slightly more friendly, we’re not having issues finding good cars, we’re haven’t to pay more than we like, that’s always the case. But the supply is out there and our guys are doing a good job of finding good solid mechanically sound cars. But our expectation is that the market -- as far as the purchasing side, it was going to stay pretty consistent with what we’re seeing now for the foreseeable future.

And then last one for me, so your terms shrink a little bit. Any outlook or targets there on where you’d like to see that go?

Well, we’d love to see that drift down a little bit. It was nice to see that the decrease even with the $629 increase in selling price. So, on a relative basis that’s a pretty good decrease in term. So about putting a better car out there, where there is more sort of term that should result in some lower credit losses down the road. We certainly like to see that term go down a little bit more, but when you’re trying to attract, those better customers, they do have choices. So sometimes, we don’t have as much leverage on a term with those stronger customers, but we love to see that term continue to go down.

Thank you. [Operator Instructions] Our next question comes from Vincent Caintic with Stephens. Your line is now open.

Three questions. On the internal improvements to the business, just kind of wondering if you could talk about, how much more improvements you think are available to you broadly speaking in your view? And would you expect this level of revenue growth year-over-year to continue at the good pace that you had this quarter?

I think when we have we talk around here about where we’re at in low hanging fruit, I think everyone in Car-Mart is pretty convinced that we got a lot of room for improvement. So how that translates in the numbers, we’re not exactly sure, but just -- and how we do our jobs day-to-day, we've got so much more room to improve that customer experience. So, we believe that will translate into some better numbers down the road that more than anything, we’re focused on coming in every day, putting on the boots and doing good work, and we think we've got a lot of room to continue to improve on the quality of the work we do every day here. As far as the sales and the top line traffic has been up for us, so we attribute a big part of that to buying better cars at better prices, get them out in front, titled and ready to sail. Basically good solid inventory management and then the sales process, everything is getting a little bit better. So, in our online presence what we’re doing on the digital side is also increasing a lot of traffic. So, again it's kind of hard to pinpoint what that's going to do to our numbers though we’re optimistic that what we’re doing operationally with inventory management especially is certainly helping a lot of traffic, which should give us a more of an opportunity to cherry pick those better credit risks in our local communities and continue to grow that top line in a healthy way by getting the very best customers in each market.

So much of all of that goes back to that general manager that the face there at the dealership, and the longer, we can keep them in their job and keep training them year-over-year, a bigger opportunity there is there as well. So, again that’s not we’re so focused on that development of those general managers.

Second question maybe, if you could talk about the store growth that we should be expecting for the next few quarters and kind of touching on that point and in your general manager bench, how big of a pipeline is there to take advantage of store growth? And for example, how many of them could be able to run multiple stores or anything you could give on the general manager bench?

Yes, we’ve got three in process and then we’ve got a few on the list beyond those three. So I think we’ve got room to leverage those top managers. It may or may not be with a new location. Our message and our efforts are directed at trying to significantly increase the number of customers that are top performing general managers served that may or may not relate in additional locations, but we’re going to really focus on growing the number of customers they serve and we do have some good room to continue to grow in that manner. As far as the bench, we’re getting better. I think that everyone here is pleased with the recruiting and the training efforts and getting that bench strength up. We're seeing some really talented folks that we’ll be ready for the keys pretty soon. The issue for us is, is the best use of those assets to improve existing locations that not be underperforming and we’ve got some of those, who were to open, new dealerships under a seasoned franchisee type GM, were to open new dealerships at on their own. So the primary focus we have at this point is really to now bench strength up, we’re making good progress, but to give you much more detail on that, at this point we can’t -- that’s our total focus here is to get how bench built up and we think we’ve got a real unique offering to folks looking for challenging carrier and with the training and support in the investments we are making in our general managers, like we feel pretty good having a good bench overtime.

And maybe two quick ones for China related. On the lower term, what’s driving your ability to lower to decline that term? And secondly, you mentioned that cherry picking better credit risk. If you could talk about, has that gotten easier to do that as less maybe the competitions easier? Or is there other ways in which you are getting better selections? And that’s it for me. Thank you.

Well, so, obviously I mentioned our traffic has been up a lot at the dealership, so that helps gives us a better pool to pick from, and we can pick the better customers. Sometimes that gets off about the competition because when there is more competition out there and those above kind of losing their lending standards. And they pickup those better customers. So, there is always a constant give and take there. And so what we try to do as a customer that we get in, is try to structure the deal that best offset that credit of the individual customers, more than sales.

But it all -- it does all struggling inventory. If you got the right product that’s in demand, mechanically sound, just a good car, and then you put increase traffic on top of that. And that gives us an opportunity to structure deals more favorably on the front end, but it all starts with inventory.

Thank you. I am not showing any further questions at this time, I would now like to turn the call back over to Jeff Williams, for any closing remarks.

Okay, again thank you for joining us this morning. Like to say thank you to our associates, just one more time, we’ve got a lot of great folks out there, working hard to help our customers succeed. So, have a great day, thank you.

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