Jeffrey Williams - President and CEO Vickie Judy - CFO

Yarden Amsalem - Bank of America Vincent Caintic - Stephens Kyle Joseph - Jefferies

Good morning, everyone. Thank you for holding, and welcome to America's Car-Mart's Second Quarter 2019 Conference Call. The topic of this call will be the earnings and operating results for the Company's second 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 President and 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. Thank you for your interest in America's Car-Mart. We are pleased with our results for the quarter. We believe that our solid numbers are the direct results of our increased efforts to recruit, train and retain quality associates, especially at the general manager position and to our commitment to operational non-negotiables through the key areas of our business. We believe that the competitive environment may be a little friendlier, that our focus on the basic blocking and tackling at the dealership level is the main reason for the results. We continue to make improvements with our presentation in terms of our facilities and our associates as well as our inventory management processes which has led to increased traffic levels and resulting sales volume increases. This business starts and ends with putting our customers in a good car for a good price. We believe that service levels after the sale which includes solid consistent collection efforts are improving and resulting in better credit results and as always we are a company focused on expense management being frugal and thoughtful with our resources all at the same time investing in our people. We must spend our money wisely as we grow. I'll now turn it over to Vickie to go over some numbers. Vickie?

Good morning, For the quarter overall revenues were $167 million with same-store revenues up 11%. This resulted from a 12.3% increase in sales and an 11.1% increase in interest income. Revenues from stores in the 10 years of age category was up 10%, stores in the 5 to 10-year category was up almost 13% to $39 million and revenues for stores in the less than five years of age category was up 36% to about $22 million. We believe our focus on having quality inventory displayed well at our dealerships along with increasing our digital initiatives is helping increase traffic at our dealerships. Our average selling price increased to $11,030 a 5.9% increase or $612 compared to the prior year quarter. This is also an increase of $15 sequentially. This increase results primarily from the increase in overall vehicle purchase costs because of the high demand for the vehicles in these car markets and this in turn results in higher selling prices. Our goal is to keep the transaction affordable for our customer and put our customers in the best vehicle for the money. At quarter end 24 or 17% of our dealerships were from 0 to 5 years old, 36 or 25% were from 5 to 10 years old, and the remaining 83 were 10 years old or older. Our overall productivity increased to 29.7 from 28.4 compared to the prior year second quarter or 4.6% increase. Our 10 year plus lots produced 31.9 units sold per month per lot for the quarter compared to 30.4 for the prior-year quarter. our lots in the 5 to 10-year category produced 28 compared to 26.2 and the lot less than five years of age had productivity of 25.9 compared to 21.9 for the second quarter of last year. Our down payment percentage was basically flat compared to the prior year; however, collections as a percentage of average finance receivables was 13% compared to 12.2% last year. We continue to be pleased with the decrease in our average originating contract term especially considering the $612 increase in average sales price and was 29.2 months compared to 29.4 months for the prior year quarter and down from 29.7 months for the first quarter of fiscal '18. Our weighted average contract term for the entire portfolio including modifications was 32.1 month for the second quarter compared to 32.5 for the prior year second quarter. The weighted average age of the portfolio was basically flat at nine months. Interest income was up $2.1 million compared to the prior year quarter due to the $41.1 million increase in average finance receivable accounted for almost 80% 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 2016. The weighted average interest rate for all finance receivables at the end of the quarter was 16.4 up from 16.1 in October last year. For the second quarter, our gross profit margin was 41.7% of sales down from 42% for the prior year and up from 41.6 sequentially. The reduction in gross margin is a result of the higher average selling price as gross margin percentages are lower at a higher selling price. This was partially offset by lower payment protection plan claims and lower repair costs as we manage inventory better and improve the quality of the vehicle we purchased. For the quarter, SG&A as a percentage of sales was 17.9% compared to 18.2% for the prior year quarter. Overall SG&A dollars was up $2.5 million from the prior year quarter. We have added over 4500 customers since this time last year and we're serving more customers per full-time associates as we work to stay efficient with our operations. We will continue to invest in our people and infrastructure to provide the best possible customer service. For the quarter net charge-offs as a percentage of average finance receivables was 6.6%, down from 7.5% in the prior year second quarter. Both the frequency and the severity of losses were improved compared to the prior year quarter. Improved collections which were up 13% versus 12.2% for the prior year and higher recovery rate contributed to the decreased severity of losses. Recovery rates for the quarter were approximately 25% to 26% compared to 24% last quarter and 22% in the prior year quarter. The effective income tax rate was 20% versus 30% in the prior year. This decreased as a result of tax reform, a reduction in our base effective rate from 37% to 24% and an excess income tax benefit from stock option exercises $543,000 in the current quarter versus $612,000 in the prior year quarter. 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 total debt was $165 million and we had over $35 million in additional availability under our revolving credit facility. Our current debt to equity ratio is 67.5% and our debt to finance receivables ratio is 30.8%. Our interest expense increased $657,000 this quarter compared to last year's quarter due to the increase in debt which was about 60% of the increase and also due to the increased interest rates. During the quarter we repurchased over 89,000 shares 1.3% of our company for $6.5 million dollars at an average of 72.44 per share. Since 2010 we have repurchased over 51% of our company for $212 million at an average price of approximately $35. We continue to have strong cash flows. In the last 12 months we've added 43.3 million in receivables, repurchased 36.1 million of common stock, funded $2.8 million in net capital expenditures, and increased inventory by $7.9 million, a total of $90.1 million with only a $26.8 million increase in debt. We are in a very good place. We are able to continue to invest in our associates, grow the business, and take advantage of market opportunities while continuing to purchase shares opportunistically. Jeff, I'll turn it back to you now.

Thank you, Vickie. We opened three new dealerships during the quarter and we have three more in process. All of these dealerships will be managed by experienced, proven general managers and we're excited about the potential. We currently have over 74,000 customers from 143 dealerships. We know that when Car-Mart opens a dealership in a new community that community is better because we're there. We contribute by helping hard-working customers with their local transportation needs by providing quality vehicles and excellent service. We care. Our plans are to expand and positively contribute to communities by bringing more customers into the Car-Mart family. Our limiting factor is finding enough qualified general managers because of our decentralized structure. Our bench is getting better and we will continue to invest in our people and we plan to grow at a rate that matches our ability to support our customers at a very high level. As always and especially this time of the year, I’d like to say thank you to our associates for their hard work and dedication to this effort and thank you again for your interest in Car-Mart. Now we’ll open it up for questions. Operator?

Thank you, at this time the participants will now answer questions from the callers. [Operator Instructions] Our first question comes from John Murphy with Bank of America, your line is now open.

Hey guys good morning. This is Yarden Amsalem here on for John. So my first question is on the cost side, I mean SG&A to gross was very strong this quarter and is this truly a function of you getting better leverage on the acceleration in sales or are there any specific actions that you’ve taken at the store level to improve performance there?

Well, the majority of it was the increase in sales so there was just a little more leveraging there. We obviously are working very hard every day at being more efficient with what we’re - the resources that we have as well, but the biggest part of it this quarter was the increase in revenues.

So how should we think about SG&A to gross going forward, I mean, do you think this level is sustainable or could there be even more room for improvement there?

I think it will be small. We always strive to leverage that SG&A, but we’ve built an infrastructure for more revenues and increased volume, so that’s really where we’re going to get the biggest bang for our buck is to continue to increase those volumes.

But we do expect - investments that we are making today we do expect those investments to be leveraged at some point down the road. It’s a little hard to know quarter by quarter, but over time our investments are expected to be leveraged through that SG&A line through higher volumes as we move forward.

Okay, very helpful thank you. And then another question on your recent investment in the recruiting of and training of general managers, could you maybe elaborate on these efforts and the results that you’re seeing thus far?

Yes, we’ve really, gone back and really revamped and established some really solid training plans for folks that come into our company into the future manager program and then after that program they go into an assistant manager position and then we continue some pretty intensive training and followup, both on the job and in the classroom and we feel like our future managers are going to come from that assistant manager position and we’re combining a lot of good solid training for those assistant managers to try to build up that bench in that assistant manager position for those folks to eventually get the keys to their own dealership. So we’ve really formalized a lot of training we’re investing a lot of resources into those areas and feel like over time we are going to have a good solid bench of folks that are going to run dealerships someday.

Great, thank you very much. I have one last question. Could you maybe share with us what you’re seeing in terms of credit availability in the subprime space as well some of the competitive environment there?

Yes, I mean, we read the same headlines that everyone else does as far as you know a little less credit out there for the deep subprime consumer, but really in the markets that we operate in there’s still plenty of competition on the lending side. We’ve not seen huge benefits from the credit side. We do feel like most of our improved results relate to us just doing a better job on the blocking and tackling, but I think that there probably has been some positive effect from the competitive environment. It’s just a little bit hard to quantify that.

Okay, thank you very much, that’s it and congratulations on the quarter.

Thank you.

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

Hey. Thanks. Good morning guys, and yes an excellent quarter. I wanted to talk about a couple of points on the third quarter. So we had really good metrics across the board and we're kind of wondering what you think these metrics can yield. So for example, the productivity sold per store what does an experienced store sell and is that the sort of level do you think you can get to and then when we think about the net losses, your net losses continues to improve for several quarters now. Is there a certain level of losses that you are targeting where we think we should get to over the next couple of quarters?

You know I would say on the productivity side we are still under 30 sales per dealership per month and if you go way back in history that number was in the mid thirties and I would say that when you look at our dealerships that we have currently, our expectations would be to – we have an opportunity to keep pushing those numbers up over time. So we think we've got quite a bit of head room to get more productive and to get better with the sales volumes and the customer accounts in our existing dealership base. So we are pretty optimistic over time that we can continue to show some productivity improvements. As far as net charge offs, we have seen some good trends as of late. We are working hard to knock that down as hard as we can. The environments are little different today than it was say in 2010. The terms are much longer, recovery rates are lower, interest rates are higher. So just mechanically we are not sure if we can get back to 2010 or 2011 type charge off numbers, but that would certainly be our goal and we are pushing hard to get there. We might just be a little limited because of business and the industry has changed quite a bit since those days.

Okay, got it, that makes sense. And then just one...

I was just going to add on really on both of these several of our general managers are still young. They are still inexperienced general managers and as they gain experience, I think that helps both the productivity as well as the losses as they gain experience in setting up the deals at the front end and working with our customers. So I think again back to that training and the experience in those GMs will help both of those as well.

Okay, very helpful and then another one on the fiscal second quarter. Were there any hurricanes or other weather related impacts this quarter that would affect the results? And then when we think about the year-over-year comparisons were there any impacts last year's quarter or weather related issues?

You know we had a few dealerships that were affected for a few days, but it wasn’t anything that made a difference in either period.

Okay, very helpful and then the last one from me, you mentioned digital initiatives, so I was wondering if you can expand on that and describe what are those initiatives? Thank you.

We have just taken some of our advertising dollars and are looking more on the digital side both with some of our website updates looking more at increasing our Google reviews and putting customers testimonials and such on all of the social media channels. We are also working on an online credit application that will help the customers get started online and spend some time there before they come into the dealership. So those are some of the big items that we've worked on.

Yes and being part of these communities from a digital standpoint it is very important our advertising is shifting more to testimonials. We've been in business 37 years and we do a lot of things to help these folks be successful. We really go above and beyond. We're going do a better job going forward of really highlighting real customer testimonials for the benefitting we add to these communities.

Okay, great. Thanks so much.

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

Good morning guys. Thanks for taking my questions and congratulations on a great quarter. I just wanted to talk about your underlying consumer, obviously we've had tax changes, gas price fluctuations. We've seen signs of wage growth. Just talk about the health of your underlying consumer as it relates to both demand and credit performance?

Yes, I think our consumer has certainly benefited from the lower tax rates and the pretty dynamic economy we're seeing right now there's more jobs and higher wages and more hours worked and all that. So our consumer might finally be getting a little bit of a raise after 10 years of not much increases there. So that it's good to see that. We feel like our consumer from a cash flow standpoint is in a better position today than they've been in awhile and that's certainly affecting our demand too. And we're doing a better job with inventory and getting good cars out front ready to sell. So when you combine the consumer being a little stronger and our offering being a little better, than we expect, both sales and credit results to look good going forward.

Got it. And then on credit specifically, it's been great way ahead of my expectations. Is that the combination of competition and the health of the consumer a little bit the rising used car prices or any of those being sort of disproportionately impactful?

I would say the recovery rates on the repossessions that’s clicked up a little bit which certainly helps us, but more than anything I think we're just doing a better job internally with that good blocking and tackling, just putting our boots on every day, punching the clock and running the business, running the play right from a credit and collections standpoint out in the dealerships.

Some of it Kyle too on the frequency side would be just the better quality of the vehicle that we’re putting our customers in, that makes the big difference in the credit loss rate as well.

Got it, that makes sense. And then just on used car prices, obviously we check the Manheim and J.D. Power and what not, are you guys seeing similar trends there and you’ve been doing what appears to be a great job whereas used car prices appear to be helping your credit while you’ve been able to sort of sustain margins, but can you give us your outlook for used car prices given your really more in the market than we are?

Yes, I’d say we’re looking for a 9 to 11 year old car and it was 9 to 11 years ago when the SAR [ph] went from 17 to 10 for a few years. So there is a lot of folks chasing a lower quantity of inventory out there, but that will eventually end. So we might see some pricing pressure. We may have to pay a little more than we’d like to pay for a while, but we do see some light at the end of the tunnel. But we’re not having trouble finding good, solid, mechanically sound cars. We are having to pay a little more than we’d like to pay. But we do see that leveling off a little bit, but going forward maybe sales price levels go up maybe more in line with inflation like we’ve historically seen.

Got it, thanks very much for answering my questions.

Thank you.

Thank you. I’m 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 and thank you for joining us this morning. Thanks for your interest in Car-Mart and thanks to all of our associates out there that are working hard to make this company better. So thanks have a good day.

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.