Q2 2020 Earnings Call
Good morning, everyone. Thank you for holding and welcome to America's car Mart second quarter fiscal 2020 conference call.
Topic on this call will be the earning an operating results for the company's second quarter for fiscal 2020 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 in access information are included in last Night's press release, which can be found on Americas.
Car Marts website at Www Dot car Mart dotcom.
As you all know somewhat 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 presence. You. These statements are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 the comp.
He cannot guarantee the accuracy of any forecasts or estimates nor does it undertake any obligation to update such forward looking statements for more information regarding forward looking information. Please see part one other companies annual report on Form 10-K for the fiscal year ended April Thirtyth 2019, and its current.
Quarterly reports furnished to or filed with the Securities Exchange Commission on form 8-K, and 10-Q participating on the call. This morning, our Jeff Williams, the company's President and Chief Executive Officer, and Vicki Judy Chief Financial Officer, and now I'd like to turn the call over to the company's Chief Executive Officer, Jeff Williams.
Okay, well, thank you for joining us and thank you for your interest in Americas car Mart.
We're pleased to report another good solid quarter.
The results were expected and provide further validation that the hard work of our associates focusing on the basics and taking care of customers.
Gives our <unk> business model real sustainable power.
Market, we serve as large and fragmented.
And consumer demand for Great service in peace of mind for local transportation needs is very high.
We have an obligation to grow our customer count.
At a rate that's in line with our ability to serve at the highest operational level.
The customer experience starts and ends with the vehicle.
We pledged to do everything we can to keep our customers on the road with quality vehicles are great customer service after the sale.
We will continue to educate consumers about the financial benefits of our offering in the market with our lower interest rates.
Order terms and our focus on putting valued customers and an equity position.
Along with a peace of mind of knowing that we have a real sense of urgency from top to bottom to keep customers on the road.
Our customers overall quality of life is better.
They're part of the Cormark family.
I'll now turn it over to Vicki to go over some numbers like you.
Good morning.
As Jeff mentioned, we had a solid quarter with record revenues of 190 million. There's resulted from a 14.6% increase in sales and an 8.7% increase in interest income.
Same store revenues were up 12.2%.
We had a great selection of quality vehicles, and our associates did a great job of helping customers get into a vehicle to fit their needs.
Investment that we've made in inventory an additional 8.8 million since last October is contributing to higher sales volumes by attracting more potential customers, including our repeat customers.
We saw solid increases across all ages of dealership.
Revenues from stores and the over 10 years of age category was up 13% stores and the five to 10 year category was up 12% and revenues for stores and the less than five years of age category was about 43% to $21 million.
Retail units sold increased by 8.7% and the average retail sales price increase of 5.1% to 11589 compared to $11030 last year.
At quarter end, 20, or 14% of our dealerships were from zero to five years old.
39, or 27% or from five to 10 years old and the remaining 86 dealerships were 10 years old or older.
Our overall productivity was 31.6 units per lot per month.
6.4% from 29.7.
Our 10 year plus slot produced 34.2 units sold per month per lot for the quarter compared to 31.9 for the prior year quarter.
Lots in the five to 10 year category produced 29.4 compared to 27.7 for the prior year and a lot less than five years of age had productivity of 25.2 compared to 25.1 for the second quarter last year.
Our downpayment percentage was up slightly to 6% compared to 5.8 for the prior year quarter.
Collections as a percentage of average finance receivables was up 30 basis points to 13.3%.
We did see some slight increases in term primarily due to the increasing average selling price.
The average originating contract term was 30.4 months compared to 29.2 for the prior year quarter and up from 29.9 months sequentially, but again the average selling price was up $559 with a 1.2 month increase in term.
Our weighted average contract term for the entire portfolio, including modifications with 32.3 months compared to 32.1 for the prior year October .
The weighted average age of the portfolio was basically flat at approximately nine months.
Interest income increased 1.8 million or 8.7 per cent compared to the prior year quarter, primarily due to the 44.2 million increase in average finance receivables and 8.3% increase.
The weighted average interest rate for all finance receivables at the end of the quarter with approximately 16.4% flat from the prior year quarter.
The gross profit percentage for the second quarter was 40.5 per cent compared to 41.7% for the prior year quarter.
Basically flat compared to the prior to sequential quarters. This is primarily a result at the higher average selling price as our gross margin percentages are lower at a higher selling price.
Well, we did sell a few more sq bees compared to the prior year most of the increase relates to selling an overall higher cost vehicle.
As a result of our focus on quality inventory and the overall strength that they used car values in our market.
Our gross profit margin dollars per unit sold increased $516 or 2.4% to 40 $935 compared to 40 819 per unit in the prior year.
S. DNA for the quarter was up 2.1 million or 16.9% of sales compared to 17.9% for the prior year quarter.
And at 57.4% of total revenues less cost of sales and the provision for credit losses compared to 60.5 per cent for the prior year quarter.
The 310 basis point improvement as important as a large part of our efforts have been focused on keeping good customers and driving down credit losses. So this measurement is important for integrated sales and finance business.
We believe the investments that we are making in our associates system and infrastructure are essential to continuing operational improvement the increased SGN nice band was mostly related to salaries and benefits, including stock based compensation as we are making long term investments focused on recruiting and developing greatest.
I see it and in infrastructure to support a growing customer base.
We added over 4500 customers since this time last year and 1700 this quarter.
We continue to stay focused on efficiencies and cost control, while continuing to invest for the long term.
For the current quarter, our net charge offs as a percentage of average finance receivables was 6.1% down from 6.6% in the prior year second quarter. We continued to see both improvement in both the frequency and severity of losses compared to the prior year as a result of.
The higher quality vehicle improve deal structures and the consistent focus on our operational non negotiables related to collections practices.
We will stay focused on these while ensuring that we provide great customer service after the sale to keep customers and their car and on the road.
The improved collections of 30 basis points better contributed to the decrease severity of the losses.
Recovery rates for the quarter were slightly lower than the first quarter fiscal 20, but approximately flat compared to the same quarter last year.
The effective income tax rate was 22.7% for the second quarter compared to 20.1% for the prior year second quarter.
Income tax expense does include an income tax benefit of 140000, and 543000 related to share based compensation for the current quarter and the prior year quarter respectively.
About a six cents per share change.
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 approximately 177 million, we had over 63 million in additional availability under our credit facilities.
Our current debt to equity ratio was 63.6% and our debt to finance receivables is 30.1%.
We did repurchase 112091 shares during the quarter for approximately $10 million at an average crop cost of $89 per share.
Since 2010, we've repurchased approximately 54% of our company for 239 million at an average price of approximately $38 per share.
We continue to have strong cash flows for the six month, we have added 43.8 million in finance receivables repurchase 14.7 million of common stock.
And at 1.7 million in Capex and increased inventory by 10.6 million. This is a total of 70.8 million with only a 24.1 million increase in that [noise].
Thank you and I'll turn it back to Jeff.
Okay, well, thank you Vicki.
Hard work and attention to detail is allowing us to grow unhealthy mean, we've opened two locations. This year and we have new dealerships and crosses in Chattanooga, Tennessee.
And then cabin Arkansas.
Additionally, as mentioned in the press release, we've begun work on our new dealership in Edmond Oklahoma.
We have I expect expectations for new openings, we will continue to open new stores as we move forward.
As we've said many times, we have significant market share opportunities from existing dealership.
Dealerships and we will continue to leverage these locations.
Cost structure and the management talents that we already had in place.
Most of our existing general managers have the potential to.
To serve 1000 customers are more from their current dealerships overtime.
It's a great time to be at Americas car Mart.
We have such a great team and our associates are dedicated to helping customers succeed.
Thanks to our customers for coming to us for their transportation needs.
<unk> into our associates for their hard work and dedication to this effort.
There is real purpose in our work and we're pushing hard to get better every day.
We will now open it up for questions operator.
At this time the purchase of Miss will now answer questions from the callers I would like to reiterate that my earlier comments regarding forward looking statements apply both to the participants prepared remarks into anything then they came up during the Q1 day.
As a reminder to ask a question you want me to press Star one on your telephone to withdraw your question press the pound key please standby well, we compile the queuing a roster.
Our first question is from John Murphy from Bank of America. Your line is now open.
Good morning, guys your downtime on for John .
First question on the call cost side, I see nature Gracia thing getting incrementally better in recent quarters any was very strong into Q as well can you maybe talk a little more about the specific actions, you're taking there and why do we see that number going to over time do you think about didn't meet do high 50, just kind of dilemma doral kind of get people.
Potentially better over time.
Well, we certainly feel like a the topline can continue to grow at a healthy right. So that's going to help with it a ratio and then in addition to that we do expect to Oh, we continue to see some improvements.
On the credit loss line, we're working hard.
We're running the play at a higher level.
And our operations team focused on collection is doing good work. So we would expect to continue to see some some good improvements.
And that ratio.
And thank you for that I think it just remind us what percentage of your SGN age is fixed versus variable.
Yeah, most most all of our as she and I is gonna be fixed.
I think a large majority of our cost or salaries and benefit related.
But almost all of our cost our fixed in nature, so incremental volumes are extremely important.
Yes.
Okay got it. Thank you and then can you maybe give us some details on the sales cadence with the quarter was was it kind of an even grow throw out or were there any particular month, there was stronger or weaker than other.
Oh, no it was a pretty solid quarter pretty consistent between months.
Okay.
Thank you that's that's a flat.
Thank you.
Thank you. Our next question comes from humility from Buckingham. Your line is now open.
Hi, Thanks for taking my question.
And just on the sales side.
As we think about kind of the change in unit volume growth past couple of quarters versus seeing.
Nice improvement a rebound this quarter can you just give us more as to kind of what the bigger drivers of that or are.
Are you seeing benefits from the online.
Digital inventory you know I think you referenced kind of the quality of inventory.
And any success, you're having just on the education of the consumers on the total cost of ownership.
More color on maybe are you seeing any those being more drivers than others.
Thoughts there.
Yeah, It's a combination of all the things you mentioned that it does start with inventory.
We've made a a good push to improve.
The quality of inventory.
And in also increased the volumes of those cars, we have at our dealerships.
So we're working hard to get titled on display units out front.
And that's attracting more traffic to our dealerships.
Were also a functioning at a higher level just from the field sales efforts that we had in place.
So in in the online effort is certainly, adding some benefit to with our our inventory online and online credit apps, all that's fairly new to us within the last six months, but we're seeing some nice improvements in those areas and then just you know just generally better customer service.
At the lot level, all that's adding up to a.
To more market share for us we think we've got room to grow these communities really need what we do.
So we feel like everything we had in place and all the hard work, we've done well allow us to continue to pick up some market share.
And our existing locations.
Okay. That's helpful and then maybe.
Talk a bit about the procurement process.
You know maybe working a bit more what some of your larger wholesalers odd to source higher quality.
Maybe kind of reduce some inventory costs and someone did you give us an update on where things stand with that and the potential to see an improvement in coming quarters.
Yeah. We've we've made some good progress with a procurement efforts we are looking at leveraging our size more than we have in the past.
Sourcing from maybe a few less sources, but holding those sources more accountable.
Creating partnerships through the chain.
And so we've got a lot of good things going on with the procurement side of the business.
And it's relatively in a new effort for us.
But we're we're catching up in a hurry there and feel like we're going to have some good answers on the procurement side in terms of getting really good cars for good prices.
At the right times in the right places by partnering with our better wholesalers.
Okay. That's helpful and then one more for me.
About kind of the <unk> repossession process.
Consumer defaults can you give us a sense.
How much you typically going to an auction.
To liquidate the asset versus maybe scrapping the car and going through that channel or something else.
Well almost all of our repos are going to be run through the auction.
Oh, we don't do anything straight to salvage.
Most of our repos are processed and sold at auction.
Okay. Thank you.
Thank you as a reminder, Casco question you wanting to press star one on your telephone.
Our next question from John Rowan from Janney. Your line is now open.
Morning, guys.
Morning warning <unk> first of all over the last question you know most hard good repossessed and then sold at auction, but there's got to be a percent I mean, I know I always remember you talking about you know a good percent hitting or going for scrap value is zero rate of cars that don't hit minimums and the auction land. So there's no bid that then.
Lined up and in itself and situation.
Yeah, that's gonna be fairly minor I think our average or.
Sales price with whole wholesales at this point is around $2000. So there.
There there are a few in that average that or you know with good two or 300 $400 range, but I don't think that's a big piece of our puzzle.
Okay, well she always talking about you know reduction and used car values as being a positive right. You can put a better current alive consumers and some is probably more mechanically sound, which obviously is really the number one reason why people with.
That's a carbon south running so.
What we've seen obviously in the fall awful lot of indexes are showing reduction and used car values you just talk through kind of.
How that impacts your recovery on the deals you have out now versus how that impacts.
Forward look on credit.
People are better car.
Yeah, I think the positives.
Far outweigh the negatives as you say.
When prices are going down.
It gives us a chance to put our customers.
In a better car for the same money.
It's a it's a very good thing for our business. There is a you might say there might be a slight negative as far as a short term recovery rates.
But even that you know, we're selling a 10 year old car with.
With 100, 800000, plus miles on it so the depreciation we get.
It is not a is not as significant as folks would operate at levels above so we consider deflation on used car prices to be very good thing for our business.
That goes back to the scrap value right. If there's an asymmetrical impact your recovery because your scrapping a certain number of cars, but you get because that goes for the price of the mental not necessarily the retail prices the car and you're getting a better hurting a benefit.
Consumer any benefit from having a better cars more mechanically sound running better right. That's where you know to me. It seems like there would be nice medical benefit to cormark, having a weaker wholesale market does that sound about right. Yeah. Yeah, we hit the floor, we do get that floor.
Pretty quick.
Okay, and then just to clarify the duration numbers that you gave it guessing it was 32.3 months.
Total we do a portfolio term versus 32.1 last year is that correct.
Yes, 32.3, this year 32.1 last year.
Okay, and then any comments on c., so whether or not your day implemented what you see happening to the to the allowance under a seasonal scenario that's it for me. Thanks.
Sure. The thesis scenario should not result in any significant change to our financials, we already provisioned for our entire portfolio through the through the term, especially with our term being a little shorter so were not expecting a financial impact there will be some additional disclosures once we do adapt.
Yes.
Okay. Thank you.
Thank you.
Thank you Sir our next question is from Kyle Joseph from Jefferies. Your line is now fan.
Hey, good morning, congratulations on good quarter Ah. Thanks for taking my questions. Most of it had been answered, but just a few follow up in terms of the same store sales or acceleration in the quarter. I know you touched on a an increase in inventory a as well some of the sales initiatives you were talking about but I think it'd be helpful. If you could.
Comment on the overall competitive environment as well.
Yeah, we we.
The competitive environment, it's been pretty is pretty stable for quite a while now we're not seeing any positives or negatives to speak of on the competitive fraud and the improvements. We're seeing internally is really a efforts that we put in place.
Within the company to carry a more product with title.
Better product and improve our blocking and tackling with the sales effort. So.
But the competitive environment is still a there's still plenty of money out there.
Jason These consumers, but we feel like we were stepping up our game in a big way.
Got it and then one last one from me just in terms of credit.
Let me see it sounds like you guys are putting a a better car out there.
And just and just weighing macro factors the health of your underlying consumer as well as you're accelerating growth.
And the fact that you've had improving credit for numerous quarters. Just can you give us an outlook a you know from.
Where we are and your thoughts on credit going forward.
Well I think that you know we've got a couple of factors here, one the increasing selling price that we've been dealing with so you know we may have to at some point make some term adjustment that I think overall, what the quality of the car, we're putting out there and the service that we're talking about for this customer after.
We sell to be helpful.
And our collections practices that we've got in place.
We certainly hope to keep those stable if not you know still improving to some extent and to add onto that.
We are really focused on keeping customers in the cormark family much longer than we had historically.
And that would be a customer that we know very well, we know their payment history, and we want to keep them in the family.
In the past.
They may be have graduated onto the used car division of a new car dealership and we're asking why so we may see some term increases for the for the right reasons as we go forward and try to keep a more these customers in the family for life by offering them, a little higher quality higher costs.
Car, but they proven their credit worthiness worthiness over the years. So this is exactly what we need to be doing as it is a company to pick up market share.
That's great color, thanks, very much for answering my questions.
Thank you.
Thank you our next questions from human left from Buckingham. Your line is now fan.
Pardon me humiliate. Your line is now open sorry about that thank you. Yeah. So just you mentioned the improved quality of inventory eating traffic as well as sales for the company how how do you feel about the inventory mix heading into this quarter versus where things stood heading into the last quarter I know the overall level of inventory.
It's higher quarter over quarter, but how would you say that your view in terms of the mix of vehicles and also the quality of the vehicles you have right now in a lot.
We feel like the mix and the quality is.
Is improving improving quickly.
And we feel like it's in better shape today than it was a year ago, and we'll continue to get to get better as we move forward.
Okay and then in the press release, you also mentioned.
Dealership in Chattanooga, Cabot as well as a one coming on at some point.
It gives a sense as to the time horizon, we should be thinking about those coming on.
And opening up.
Yeah, we're looking at the fourth quarter four a.
Chattanooga and Cabot.
And we're still little new with the Edmund leased to have a time specified yet but.
All three of those dealerships are going to be very good for us and we're trying to get those open just as quickly as we keep.
And then obviously you've talked about how the bench of managers will play an impact in terms of the longer term outlook for dealership openings, how do we think about maybe calendar 2021.
And yeah, where you think the benches now and the ability to kind of.
Open dealerships beyond the ones you've talked about now.
Yeah, our benches getting a stronger our training efforts are Uh huh.
Very good and getting better and so we feel like we're on a good track to have a bench of qualified folks to run dealerships.
And we're getting closer in that area.
We do plan to open a few dealerships a year, but when we opened a dealership it's gonna be a dealership with very high expectations like like Edmund.
But nothing specific as far as 21 at this point, but to the safe to say that we will open some new locations.
In 21 in so it's good spots.
Okay, and then last from me.
Yeah, obviously as we think about the rise in the average selling price.
Should we think that that's predominantly driven by increasing repeat customers and kind of you know going up the credit spectrum, a little bit for the right customer how how much is that really playing a factor I know two initiatives that you've had but.
Should we think that you're gaining significant traction in that or how we you know how is that from <unk>.
Well our repeat business is is increasing.
And we know that what we offer consumers.
He is a better financial deal than they might get down the street with a longer term and a higher interest rate. So we're really trying to educate a or markets.
About the financial benefits.
A car Mart transaction than it is making a difference would repeat customers.
And it is bringing in folks.
That might choose another option.
So it's up to us.
We're gonna benefit communities is to make sure. We're educating those communities on the total cost of ownership and we think we've got a very good answer for consumers from a a cone cost standpoint.
Thank you for taking my questions.
Thank you.
Thank you.
At this time I'm showing no further questions I would like to turn the call back over to Jeff Williams for closing remarks.
Okay, well once again, thanks for listening to our call. This morning.
As always just like to thank all of our associates for their dedication and commitment to this effort.
We've got a great team out there and.
We're going to keep pushing on so they can have a great day.
Ladies and gentlemen, this concludes today's conference call. Thanks for participating you may now disconnect.