Q2 2021 America's CAR-MART Inc Earnings Call
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Before we begin I would like to remind everyone that this call is being recorded and it will be available for replay for the next 30 days.
On 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 Dot com on car Mart dotcom.
You all know some of managements comments today may include forward looking statements.
Inherently involve risks and uncertainties that could cause actual results to differ materially from managements present view. These statements are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995, the company cannot guarantee the accuracy of any forecast or estimates.
Nor does it undertake any obligation to update such forward looking statements for more information regarding forward looking information. Please see part one of the company's annual report on form 10-K for the fiscal year end of April Thirtyth 2020.
At its current and quarterly reports on furnished to or filed with the Securities Exchange Commission of on form 8-K and 10-Q.
Participating on the call. This morning are 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 which of the company's Chief Executive Officer, Jeff Williams.
Okay, well, good morning, and and thank you for joining us.
As we mentioned in our press release on.
Disciplined and focused approach is getting us through the many challenges of of 2020.
Businesses moving forward at an accelerating pace.
And proving the resiliency of and the value of our model.
When you have 2000 dedicated associates all pulling in the same direction.
And we're making significant investments and the key areas of.
Of the business and laying the ground work for our future growth.
The supply demand imbalance in the used vehicle market, especially at the lower price points is real and.
It has resulted in some volume challenges.
It has also led to meaningful increases in revenue.
Our procurement initiatives are targeted to give us some relief.
And to be able to better control on destiny on the supply side.
The market, we serve is large and fragmented.
Consumer shopping preferences and expectations are changing.
And the rate of change is accelerating and we're committed to free inventing and reinvesting in the business in order to adapt and.
Prepare us for the long term.
Our business continues to both generate significant cash flow and increased borrowing capacity and at the same time, maintaining a very conservative balance sheet.
Which will enable us to continue to solidify our place in the world and.
Prepare us to serve a much larger customer base.
And again, we're making significant investments in the areas of customer experience inventory procurement and recruiting and training.
Improvements of these key areas.
Well help us drive increased traffic and productivity.
Technology and systems upgrades will also be invested in to support these initiatives.
And provide a solid foundation for future growth.
We continue to look to possibilities of centralizing certain non core functions that will not take away any advantages of our localized community based structure.
And the ability to make key customer decisions locally is extremely important to our success.
We are aggressively addressing changes in consumer buying prep and preferences.
And building out an efficient seamless digital and of customer friendly sales process that will compare favorably with alternatives.
As our infrastructure strengthens.
We will aggressively market, our lower total cost of of disadvantage.
And were more heavily promote the real.
Oh, but intangible benefit the customers realize when they're part of the car Mart family.
We give customers peace of mind by keeping them on the road and we take the stress out of one area of our customers' lives and we believe strongly.
We have an obligation to serve significantly more customers overtime.
I'll now turn it over to Vicki to go over some numbers Vicki.
Thank you Jeff Good morning, everyone. We.
We had another record quarter in terms of revenues and net income our total revenue increased 17.4 per cent up to 223 million. The increased revenues resulted primarily from an increase in sales due to a 15.3% increase and the average sales price and a one point.
9% increase and retail units sold.
Interest income also increased by 18.2% and same store revenues were up 12.8%.
Revenues from the stores and are over 10 years of age were up 13% stores.
Wars and the five to 10 year category were up 16% and revenues for stores less than five years of age we're up to about 21 million.
Although we did have improving sales volumes during the quarter volumes continue to be impacted by the top supply of inventory, particularly at the lower price points.
At quarter end, 17, or 11% of our dealerships were from zero to five years old 40.
42, or 28% were from five to 10 years old and the remaining 91 were 10 years of age or older non.
And our overall productivity was 31.2 units per lot per month compared to 31.6 for the prior year quarter.
The 10 year plus lots produced 33 units per month per lot.
Compared to 33.9 for the prior year quarter lots and the five to 10 year age category produced 28.8 compared to 29.2.
And lot of less than five years of age had productivity of 27 compared to 23.3 for the quarter second quarter of last year.
Our down payment percentage improved was up 6.26 0.4 per cent compared to 6% for the part of your quarter.
Collections as a percentage of average finance receivables were at 12.9 per cent compared to 13.3 per cent for the prior year quarter. This was primarily due to the extension and the average contract term and partially offset by improved collections on our delinquent accounts.
The average originating contract term was 33.8 months compared to 30.4 months for the prior year quarter and at all so from 32.4 months sequentially.
The average selling price was up 1700, and $76 with only a 3.4 month increase and the term compared to the prior year second quarter. Our average monthly payment is approximately $432.
Our weighted average contract term for the entire portfolio, including modifications was 34.7 months compared to 32.3 months for the prior year.
And the weighted average age of the portfolio was basically flat at approximately nine months.
Interest income increased 4.1 million or 18.2 per cent compared to the prior year quarter on.
Merely due to the 92.8 million increase in average finance receivables of 16 point at 16% increase.
The weighted average interest rate for all finance receivables at the end of the quarter was approximately 16.4 per cent flat from the prior year quarter.
Gross profit per retail unit sold increased $770 up to 57 of five this was 15.6 per cent compared to the prior year quarter. The gross profit percentage was 40.7 per cent compared to 40.5 per cent for the prior quarter, but down.
Cohen from the sequential quarter at 41.7 per cent the.
The improvement in gross profit resulted from improved wholesale margin, which was due to the strong demand and a lot of supply the lower price units.
Partially offset by the lower margin on the retail units.
And increasing average selling price results and a lower gross margin percentage, but higher gross margin dollars per unit on.
Our gross margin percentages are lower at a higher selling price.
The mix of the type of vehicle sold was fairly consistent and she'll be sales increased approximately three percentage over the prior year quarter.
Our inventory volumes are back up to prepare and dimmit levels to support higher sales volumes as we move toward tax time.
S DNA for the quarter was up 4.2 million compared to the prior year quarter, but down as a percentage of sales to 16, and a half per cent compared to 16.9 per cent for the prior year quarter.
As DNA as a percentage of total revenues less cost of sales and the provision for credit losses was 51.8 per cent compared to 57.4 per cent for the prior year quarter.
This metric is very important for us as an integrated auto sales and finance business and.
A large part of our efforts and as DNA spend are focused on keeping good customers on the road and driving down credit losses were making good progress on our initiative of revamped procurement efforts with preferred vendors purchases from rental car companies and reconditioning effort.
And our customer service efforts and the digital area and improve service contracts, along with the continued investments and recruiting and training of our associates on.
All of these with the goal of great customer service and increasing the number of customers that we can serve at each dealership.
For the current quarter net charge offs as a percentage of average finance receivables was 4.7 per cent.
Down from 6.1% and the part of your second quarter.
We saw improvements and delinquent accounts and our accounts 30, plus day past due was at two and a half per cent compared to three and a half per se in the prior year quarter.
At the end of the fourth quarter, we did increase our allowance for credit losses to 26, and a half personnel related to the uncertainty of Cove bid and the macroeconomic environment although.
Although our portfolio is solid and our credit loss results are positive there continues to be much uncertainty caused by Cove at 19, and its potential impact on our customers are collection repossession and the overall economic environment as we move flow.
The effective income tax rate was 23.6 per cent for the second quarter compared to 22.7 for the prior year quarter.
Income tax expense included and income tax benefit of 240000, and 140000 related to share based compensation for the current quarter and the prior year quarter respectively.
We expect our base effective tax rate to be approximately 23, and a half percentage going forward prior to any excess tax benefits from stock option exercises.
We continue to have strong cash flows and a solid balance sheet at quarter end. Our total debt was approximately 214 million.
We had 19 and a half million and cash and over 27 million in additional availability under our revolving credit facilities on.
Our current debt net of cash to finance receivables ratio is 28 per cent compared to 29.7 per cent at this time last year.
During the quarter, we added 49 point Fourmillion and finance receivables.
We funded 2.2 million and net capital expenditures, we increased inventory by 11.2 million or a total of 62.8 million with only at 30.3 million increase in debt net of cash now I'll turn it back to Jeff.
Okay. Thank you Vicki.
As we've said repeatedly our offering to the markets. We serve is unique.
And on 150 existing dealerships have significant room to grow.
During the last couple of quarters, we consciously decided not to fully participate.
And the buying frenzy at the lower cost and of the use of vehicle market.
As we did not think there was value there from the consumer standpoint.
This decision.
Of course, this little sales volume and the short term.
But again, our procurement efforts.
And a return to a more normal flow of products and the market will.
Well help us going forward.
We're going to prioritize the allocation of capital of the gaining market share in the areas. We currently serve.
As we have proven management talent.
And a long history with our customer base.
We also believe our offering is superior to other offerings and the market.
We've opened two new dealerships this fiscal year and.
We have two more and process.
And Edmond, Oklahoma and Norman Oklahoma.
So we're proud to be growing.
And at the same time building and infrastructure that will support.
A much larger business. This is possible largely because of the commitment of our associates and the power of our business model.
There's real consumer enthusiasm for our offering.
Really driven by a superior proposition local presence and genuine and authentic commitment to our customers.
Coupled with the advantages of our captive lending arrangement and our focus on costs.
We believe that our future is very bright we currently have about 84000 customers.
And we're investing to serve many many more.
Thank you to our associates, who are focused on taking care of each other and our customers.
Especially as we see a rise and cobot cases in our trade areas.
And thank you for making our communities better.
We will now turn it over to the operator for questions operator.
At this time of the participants on 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 and to anything that may came up during the Q and <unk>.
As a reminder, task of question you won't need to press star one on your telephone to withdraw your question press the pound key.
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Our first question comes on the line of John Murphy from Bank of America. Your line is now open.
Good morning, everybody.
And number of questions Vicki first on the the ramp up and critical of reserves for you and expectation around some.
Potential unfortunate and trouble around Cobi I'm.
I'm just curious what your experience has been and so far because they didn't think you'd seen too much disruption and how you're thinking about that going forward because you.
The reality is.
You are seeing increased demand for vehicles as you know on areas, where cold and it has hit in the past and people will be more willing to pay their their loan side I'm just curious how you're you're you're coming up with that that thought process and what the accounting rules are that are driving of those inquiries and reserves.
Sure well like you said right now both on the sales side and the credit at La side, we are seeing and increased demand and people are saying and there would be helpful. But.
And I think as we look out here and we're a little unsure of the political environment on sure of any additional stimulus payment. We know there are several deferment and rent moratoriums that are all coming to and and I think there's still a lot of questions around businesses.
Is and small businesses I mean of seen a lot of statistics regarding how many businesses may be expected to be falling bankrupt over the next few months as EVP and.
Used up and there are additional cash they've had stuck bakkies back.
Are used up so I just.
Macro economic uncertainty out there and have had.
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That's true and especially undersea so that is one of those sales.
You need to consider when you look at your credit losses.
And so I think until there's a little more clarity and you know what happens over the next coming months and and tax time and those related collection and we just felt it was great and to leave that additional reserve on looks at this time.
Okay, and then just maybe a quick follow up on on that and how important you think stimulus checks have been to your consumers directly and then.
And there's a layer cake of steam and such as you mentioned on on PPP behind that to the small businesses. You think the PBP has been equally as important as individual stimulus checks and interest you know how do you think about that go on for it sounds like you have some concern.
Yeah, I do think that that obviously has had to help both our consumers and then the small businesses and in keeping people employed and so I do think that's had a good impact I also think that we've certainly made and effort within our company to though to continue to work with.
Consumers.
And so we've we continue to make improvements internally I think that are helping to so its hard to way you know what.
We're doing internally versus what's happening out there and the market place.
As you know in our business and a lot of.
What other options are out there for consumers and to Jeff's point, we feel like you know, we've got a value proposition and as long as we're working with consumers that well be able to keep them on the road and in their cars.
And I would just add John that at most of the stimulus kind of ran out toward the end of July so the entire quarter basically was within on any consumer stimulus out there and our collections were a other than the term on.
Collections were actually better this quarter and last year's second quarter, even though the stimulus at pretty much run out.
Oh.
Yeah, very interesting dynamic and then just on supply relief I mean, obviously, there that vehicles are out there, but it did sound like you know supply at at reasonable prices is really.
What you're getting at Jeff I mean, when do you think.
Net eases I mean, it sounds like you are saying your inventory is relatively normalized at them.
Moments and maybe at ease and at.
And as we speak and did you need to stretch a little bit of to restock that inventory on acquisition costs and I'm. Just curious how you think about this supply normalizing either you know right now or over time.
Yeah.
It's hard to say these is theres been again, a real frenzy at the lower price points a lot of smaller dealers are chasing a low dollar car.
And we kind of chose to step out of that a frenzy. If you will.
And now we're getting closer to the textile and so we're not really expecting.
Huge.
At relief.
On the of the cost of cars and the supply of cars going up a bit of a demand and.
Until maybe at the point, we get through tax time, even though repossessions are flowing a little bit and.
New car sales are up a little more than they were.
We're not really expecting.
Much of a change and that the pricing of used cars availability for us.
Until maybe a after tax non closer to the summer months.
Got it Okay. That's very helpful. And then just lastly, when you're talking about.
Focus on gross I mean, what kind of parameters are you thinking at about over time is this really accelerating store openings, maybe doing a little bit more on line and although you know I mean, your consumer of probably isn't bad quite to a significant acceleration or just just yet and they maybe over time.
Yours, or maybe productivity per per store and how are you thinking about sort of growth parameters and and you track gross and the future.
Yeah, I'll back at the little bit at all the investments Weve been making the last several years, starting with the inventory management and procurement.
We have seen enough and we know enough at this point to to be pretty confident.
At our company and the talented people, we have we're going to be able to find.
A large number of very good and mechanically sound.
Oh cars for a good price as we move forward. So we have a lot of comfort and what we're doing on the procurement side at the same time, we're building and infrastructure on their recruiting and training side to make sure we're getting the right people and the company and keeping and trained and then and on the customer experience side.
As far as online sales, making.
Making some huge progress there and then as Vicki mentioned, we've got some new service contracts.
Just around the corner, so we're really gearing and the company up to.
To handle a lot more volume and we feel like when we moved beyond the pandemic and move back to a point where things are more normal and.
And the economy comes back around and we're going to be and a fantastic spot to.
To really pick up some market share and our existing markets and then also at several good the new locations each year and continue to look for a correct position opportunities we think that.
In fact at where our balance sheet is actually less levered today than it was a year ago with this significant growth. We've seen is just another.
A key indicator of how powerful what we have is.
And we're just we're in a spot where we're feeling better and better about all the areas of business and.
And we're and we're ready to of the keep pushing volume's up and get more market share in the markets. We currently serve.
Great. That's very helpful. Thank you so much guys.
Thank you and Q.
Thank you on our next question comes on the line of Kyle Joseph from Jefferies. Your line is now open.
Good morning, guys, congrats on a nice quarter and and thanks for taking my questions on this.
See you guys come in and a lot of at used car pricing is.
The good thing for your business is obviously that that benefits credit can you can you walk us through trends you've been seeing in terms of losses from a form of frequency and severity perspective.
Well, obviously from a frequency perspective losses are much lower again kind of back to.
This is a real need for the people in our markets, we're doing a nice job of helping them through these situations and the co bid situations and job changes that's going on right now.
So frequency is much improved.
The the severity was improved at a lower much lower level, we will continue to experience and severity challenges as we move forward when you're selling a higher price car and the selling price continues to increase.
But that car is also and much better vehicle with lower mile and we think that that's going to be at positive and for credit losses for the consumer both in terms of the repair and and the car is worth more when you do have to take it back. So there's really a lot of positives going in this area.
Once we kind of get through some of these market uncertainties that we're in right now.
Got it very helpful. And then in terms of and competition, you know and the pandemic started and we heard anecdotally that at a lot of you know traditional providers of credit and the space. We're we're pulling back on.
And have you guys seen that and or have you seen any and any loosening of credit.
Certainly have not seen any loosening and competition is there still some competition out there but.
We Oh, we have a again a very healthy balance sheet.
Investing in the areas, we know aggressively going after market share.
And feel like what we do is unique and the fact that we can fund.
Businesses of keep running the businesses that make sense and have the appropriate returns for us.
We're going to continue to pick up market share and and gain advantages over the net.
Competition as we move forward.
Got it and and last one for me on him at the front end, maybe a difficult one given all of the uncertainty out there, but you know on from a and from a seasonality perspective, obviously 2020 was very unique and see the seasonality was thrown out the door, but as you're thinking about the business over the next call at year or further out of you.
We anticipate kind of and normal seasonality going forward.
Well, it's kind of hard to say with the stimulus kind of still up in the air and and whether that's a.
The timing of that if anything might be the same as the tax time or it's.
We're kind of we're preparing for a normal tax time understanding that it probably won't be normal.
And then of course, if jobs come back and then the economy gets humming and vaccines are out there by the summer.
We might expect to see some some good solid demand.
In the summer months and so it's a little hard for us to tell right now.
That's totally fair I understand thanks, very much tranche of my questions. Thank.
Thank you Kyle.
Thank you. Our next question comes on the line of John Rowan from Janney. Your line is now open.
Good morning.
Good morning.
Sure of how comfortable are you at that nearly 35 month portfolio duration you.
You know given that we are starting to see I mean, we're still at peak at high levels, but softening of the peak used car prices from the summer.
[noise] well I think.
Looking back historically on our business.
We.
We maybe didn't have as much confidence in our product historically than we than we do now.
So I think we were ultra conservative on the term of just not having confidence and the quality and the mechanical stability.
Of our car as much as we do now.
So we're still significantly below competitors on the term.
And we feel like we're putting at good solid and mechanically sound car out there.
And we don't believe that heading term further on customers is a negative and in fact its a.
It's a positive thing.
Keep that monthly payment down and keep us competitive with with some folks and just look at the payment.
As far as marketing so I think it at all goes back to the quality of our product how confident we are and our supplier network.
How we are really focusing on on on at the lot level and making sure we don't let a car.
Leave that has any issues at all and then.
That customer set up for success and then again.
Our new service contracts, we believe we're going to be able to keep even at a closer on high on.
Maintenance of cars after sale of staying in contact better with our customers after sale of keeping them on the road.
And.
So we're not we're not concerned with the stretching that term out it's the right car and the right customer and we're gonna have the right support after the sale to keep them on the road.
Okay, just stay with duration for one more minute I guess I struggle to understand the duration is mostly a function of higher prices I think that's what you said last quarter that goes on higher price vehicles are coming in and you have to extend duration order of keep the payments affordable or if it's you proactively going after your best customers and giving them at better monthly payment.
And as you know.
And yet at the end of the day trying to figure out of the duration and the cash conversion cycle continue to moving the current direction, which is slower cash conversion on on more duration or if along with a paring back of the wholesale market do we actually starker claw back and pull that duration down a little bit and speed up the cash conversion cycle.
Well, Yeah, I would think if you know the the great part one day part about our businesses, we we adapt and adjust to the market.
And there's a commodity aspect to the used car market. So we're kind of.
We're subject to sort of the quantity and the quality and the pricing of what's out there to a large extent so we've got to adjusted and be pretty of flexible.
On what we do and how quickly we do it and.
So, yes, if conditions change and we do have an opportunity to shorten that a term we would certainly take advantage of that.
And that is always a balance for us.
John I will add that you know as we tried to grow customer accounts and keep customers and the family and to Jeff's point and we're trying to keep some of these better customers and they're looking for a little better vehicle and.
And they have more options out there that we will continue to support those customers probably with with some term but to Jeff's point, we we want to be flexible.
And in that area.
Okay. So I mean, what I basically take from this is that if we do see you know cool yeah off of record used car prices that we could see that duration come down but it's not.
Paraphrasing here, but it's not going to come down quite as much as you may think simply because you are offering more term Ted good customer, who you want to keep within the core margin business correct.
And at as far as cash conversion that means more customers are successful.
So you could have a situation where the terms actually out at our cash flows are actually improved because we're having less defaults better paying customers and higher recovery rates. When we do have to take a car back. So it's not of it's not of one for one equation here okay.
Okay, Alright, thank you very much.
And John Kim.
Thank you as a reminder to ask a question and you will need to press star one on your telephone so withdraw your question press the pound cash.
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. Thank you once again for listening and thank you for your interest in America's car Mart.
And once again, thanks to all of our Great associates out there that are taking care of each other.
Taking care of our communities.
And and taking care of our customers at the highest level. So thank you and have a great day.
Ladies and gentlemen, and this concludes today's conference call. Thank you for participating you may now disconnect.
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