Q2 2022 America's CAR-MART Inc Earnings Call
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Okay.
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Good morning, everyone. Thank you for holding and welcome to America's car Mart's second quarter fiscal 2022 conference call. The topic of this call will be earnings and operating results for the company's second quarter fiscal year 2020 to beef.
<unk>, 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 nights press release, which can be found on America's car Mart's website at www.
Dodge car Mart back 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.
Private Securities Litigation Reform Act of 1995, the company cannot guarantee a curious 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 off.
The company's annual report on Form 10-K for the fiscal year ended April 32021, and its current and quarterly reports furnished to or filed with the Securities 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 Vickie, 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 this morning, and thank you for your interest in America's car Mart.
For the quarter total revenue was up 29% over $288 million.
Unit sales volume per dealership.
Referred to as productivity increased to $32 seven retail units sold per dealership per month or close to 6%.
This in a period with supply shortages at all time highs, we believe that productivity would have been better had the supply of used vehicles being at more normal levels.
As a reminder, we are a fully integrated auto sales and finance company.
We're both a retailer of used cars and we finance almost 100% of our sales.
Powerful captive lenders relationship.
We buy the cars the range for transport and repair merchandize the car sell the cars with <unk>.
Provide financing to the consumer and we service the retail installment sales contracts, which include servicing our add on products.
As we look at the key variables in our industry spin.
Specific to our unique place in the market.
We look at the price and availability of vehicles.
The resulting retail price to the consumer and the gross margin dollars generated.
The term length, which will result in an affordable payment for our consumer.
And give our customers true equity in the transaction.
We look at productivity levels supporting a larger number of customers, allowing us to leverage our cost structure.
Look at overall unit loss rates, which is the ultimate customer success factor driven by our strong consumer advocacy.
All of our ongoing initiatives.
Which are in process to address these key industry variables.
Growing us to improve and scale our model without losing the benefits of the decentralized.
Character lending nature of our business.
The overriding theme and direction of all of our initiatives and our investments is to improve operational efficiencies in the field.
By reducing the amount of non core work.
Various friction points, allowing our talented field associates at the direction of our general managers to focus on improving the business and serving more customers at a higher level.
We have an obligation to serve more customers as customers lives and our communities are better with car Mart.
And once again, our key initiatives and investments.
We are focused on enhancing the customer experience and are in the areas of purchasing procurement and inventory management.
Continuing to centralize certain functions to get scale benefit without losing local sourcing opportunities and to use data.
To a larger extent with inventory management and inventory planning, our new service contracts and are getting cancellation products are fantastic add on products for our consumers and are designed to keep customers on the road with utilizing nationwide service providers.
And also moving the administrative functions related to these products more to the corporate level our.
Our technology investments are designed to attract more sales opportunities our website and loan origination systems.
Increasing the tunnel.
As a result of more unit sales, which will in turn lead to more repeat business over time currently about 50% of our sales are to repeat customers.
We will use data more in our technology investments as we mined for customers in equity positions and use marketing to a larger extent for existing customer base.
We will centralize certain aspects of our collections efforts remote collection specialists for phone web chats and texting to supplement the great work that our field associates do and the collections efforts.
Recruiting training and retention of quality associates, our field associates with their face to face interactions with our customers are critical to our success as we run the play in block and tackle out in the field.
Our branding advertising and marketing.
As our collections company.
We didn't have to advertise much but more of a sales company. Good at collections, we realize that the value of solid branding and marketing efforts is real and we need to keep the message fresh in the minds of our consumers.
I will now turn it over to Vickie to go over some numbers Vickie.
Good morning, everyone.
As Jeff said total revenue increased 29, 1% up to 288 million. This resulted from a five 7% increase in retail units sold at 21, 1% increase in the average retail sales price and interest income increased by 38, 8% by 10 million.
Our same store revenues were up 28, 2%.
Revenues and productivity were up across all age categories of dealerships and productivity overall improved to an average of $32 seven units sold per store per month compared to 31.2 over the prior year quarter.
At quarter end, 17, or 11% of our dealerships were from zero to five years old.
35, or 25% were from five to 10 years old and the remaining hundred or 10 years old or older.
The 10 year plus lots produced 33.8 units sold per month for the quarter per lot lots in the five to 10 year category produced 39, and a lot less than five years of age had productivity of 29.9.
The vintage of dealership and related productivity is often higher at our older dealerships due to the experience level of the manager as well as an established customer base and that's a higher percentage every peak customers.
Total collections of principal interest and late fees increased by $21 million or 19% over the prior year quarter and improved six eight per cent per average customer.
Principal collections as a percentage of average finance receivables were at 10, and a half per cent compared to 12, 9% for the prior year quarter.
Principal collections remained strong with the reduction in the amount of principal collected in line with the expected change due to the average term increases.
The average originating contract term was $39 seven months compared to $33 eight for the prior year quarter and up from 38 eight months sequentially.
The average selling price again was up 21, 1% or 20 $814 with a 5.9 month increase in the term compared to the prior year second quarter.
However, average wholesale prices in the market were up over 30% year over here. So our team has done a good job of working hard to find the best quality of vehicles at an affordable price for our customers.
Our average term length is still well below most competitors in our industry and we will continue to review term links for the right customer and the right vehicles as we seek to gain market share.
Our weighted average contract term for the entire portfolio, including modifications was 40 months compared to $34 seven for the prior year quarter.
<unk> average age of the portfolio decreased slightly from approximately $8 eight months to eight four months.
Total gross profit per retail unit sold increased by $644 to $63 49, that's up 11, 3% compared to the prior year second quarter.
The gross profit percentage was 37, 5% down from the sequential quarter at 38, 1%.
This reduction in gross profit percentage resulted from the lower margin percentage on higher retail sales prices according to our pricing guideline.
The gross profit dollars continue to improve and we're doing a nice job of controlling other cost of sales expenses and an increase in cost and inflationary environment as we gain market share.
SG&A for the quarter was up $4 6 million compared to the prior year quarter and down 1.6 million sequentially. We continue to leverage the investments, we're making with SG&A at 14, 8% as a percentage of sales compared to 16, 5% for the prior year.
Quarter and from 15, 7% sequentially.
We are now serving over 93000 customers an increase of more than 5100 in the last six months with over 2000 and total associates.
Jeff mentioned each of our initiatives with a focus thing to provide excellent service to a larger number of customers and we're focused on doing this in an efficient manner.
For the current quarter net charge offs as a percentage of average finance receivables was four 8% relatively flat from four 7% in the prior year second quarter.
And it's important to note that charge offs were six 1% for the quarter ended 10, 31 19 pre pandemic.
We did see a slight uptick in our frequency of losses, just above the unusually low prior year period levels, our severity of losses on a relative basis, we're still improved compared to the prior year quarter.
Recovery rates of repossessed units also contributed to the decrease in net charge offs recovery rates for the quarter were approximately 28% compared to 26, 7% in the prior year quarter.
Our accounts 30, plus past dues were.
4% compared to 2.5% in the prior year second quarter and 3.5% at 10 31 19 pre pandemic.
30, plus delinquencies were up partially due to the Sunday month end close date and Sundays are generally the highest as with everyone. In the market. We do expect credit losses to normalize somewhat over time, but there's no historical reference for what that looks like in these times.
But as Jeff mentioned, our initiatives are aimed at creating a better customer experience and improving customer success rates compared to historical norms.
The effective income tax rate was 22, 4% for the second quarter of fiscal 'twenty, two compared to $23 six for the prior year quarter.
Income tax expense included an income tax benefit of 265000, and 240000 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 24% going forward prior to any excess tax benefits from option exercises.
At quarter end, our total debt was approximately 324 million, we had $2 1 million in cash and approximately 107 million of additional availability under our revolving credit facility.
Our current debt net of cash net of cash to finance receivables ratio is 33, 3%.
During the first six months of fiscal 'twenty, two we have added $157 million in receivables increased.
Inventory about $27 million, and we've repurchased $20 million of our common stock while funding 7 million in capital expenditures.
We did increase our credit facility during the second quarter and added two new lenders were very excited by the participation and the commitment of our lending group.
The increase is fundamental in our strategy to transition from a collections company to more of a sales company very good collections. The increase facility will allow us to continue to grow our customer base for a period and to continue making key investments to better serve our customers both digitally and in person.
As Jeff mentioned in the press release, we believe our conservative balance sheet will allow us to increase our available financing for future growth by accessing the securitization market as well at some point.
Now I'll turn it back to Jeff.
Okay, well. Thank you Vicky once again were pleased with our progress and believe we're in the early innings with our key initiatives.
Now serving over 93000 customers that's up about 11%.
In the last 12 months.
And we believe that most of our existing dealerships could be serving over 1000 active customers and we're currently at 630.
Ernie, earning repeat business and increasing the funnel of potential new customers is.
It's very exciting to us and we're optimistic about our unique offering to the market.
And our place in the world as we move forward.
As Vicki mentioned, our sales price was up 21%, but wholesale prices in the market are up over 30% as.
As we work hard to maintain affordability for our customers.
We're in the boat with them.
Help them succeed on their underlying contracts.
We're seeing market share gains and productivity improvements as we attract more customers to the family. So that we can keep those customers in the car Mart family through repeat business.
As we sit on our press release, we believe our highest and best use of capital is to grow market share for Mike from our existing dealership base.
We will continue to open new dealerships as we move forward.
We're very excited to be opening our Norman Oklahoma dealership.
In addition to the El Reno this last quarter.
As we expand our reach in the Oklahoma market.
We will also continue to look for acquisition opportunities and believe there are several excellent operators, who would like to join our car Mart family.
The cost of operating in our industry continues to increase at a very high rate and we provide an owner with an attractive exit strategy.
The debt markets are very supportive of our of solid auto finance companies and with our focus on cash flows and cash on cash returns.
We believe solidly that we can continue to grow and pick up market share at the right pace.
Last but certainly not least we would like to recognize and thank our outstanding and dedicated and committed associates, who carry out our mission vision and value every day and very difficult operating environment.
It takes a great team to excel in this high touch consumer business.
We're very proud of our associates.
And their work.
We'll now open it up for questions operator.
At this time the participants we will now answer questions from the callers I would've liked the REIT to REIT stopped my earlier comments regarding forward looking statements apply both to the participants' prepared remarks and to anything taught me come up during the Q&A.
If you would like to ask a question. Please press star one on your telephone keypad and to withdraw your question press. The pound key your first question comes from Kyle Joseph with Jefferies. Your line is open.
Hey, good morning, Jeff how are you guys.
I wanted to start on a on a credit I think is talked about losses normalizing. Obviously I think your business is a little insulated given the auto exposure in used car prices, but.
Is the outlook for kind of you know frequency to continue to normalize but in terms of severity. It should be kind of below historical averages until you know he used car prices eventually kind of get some relief, but at that point I E. You would have some offset in the gross profit margin am I thinking about that correctly.
Okay.
Well there will continue to be some pressure on the severity as well if you think about the larger dollars amount financed.
So when you take one of those vehicles back your severity will be higher our challenge there is and what we're trying to do is keep our customers and the cars longer.
Get them closer to an equity position to keep that severity down.
Yeah, and we're just we're doing so many things to improve the customer experience and keep customers on the road longer.
But you can't be in this environment and not expect some kind of normalization over time, we're just.
A little on sure at this point.
We believe that we can manage credit manage credit well.
We do expect good credit results as we look forward.
But I think consensus in the industry as there will be some normalization over over time, but we don't know what that looks like yet, but all of these investments we're making all the efforts that we're putting in place to improve that customer experience.
And take some noncore work out of the field all those directives and initiatives are meant to improve customer success rates over time.
Got it and then one follow up for me.
A two part question if you could just talk about competition. Both in terms of the supply of credit available to the auto market as well as some of the other mom and Pops you compete against on the dealership front and then talk about opportunities for expansion, whether it be to know where all of our M&A.
Please.
Sure well on the competitive side.
We do believe and are seeing that are smaller dealers are having some trouble.
With the increases in the car cost and the increases in cost to operate.
The businesses are.
So there there are market opportunities for us and picking up market share from smaller operators, who might not be able to thrive and survive in this type of environment. So that's a that's a positive.
On our side.
And we are seeing some some early benefits from that on.
On the credit side there there is as always there's plenty of credit.
They're from bigger players.
But the credit that is out there is rational.
It's something that we can match up with very well against in terms of our pricing and our credit. So we feel good about that.
Syed on the competitive side.
We are picking up market share from smaller competitors and on the expansion side. We do continue to believe we're going to open up some a few dealerships each year.
And then the acquisition side.
I believe there's some very good smaller players.
Players out there.
Would love to be part of the car Mart family.
We look to expand our footprint. So we've got several channels of expansion.
The primary focus of course is increasing customer count from the dealerships. We already have we believe there's a large amount of market share to pick up from getting better and more productive supporting more customers selling more cars from the network. We already have and then when you put new dealership openings.
And that mix and then some acquisition opportunities we believe that we have a long.
Road for expansion with the with our base business here.
Very helpful. Thanks, a lot for answering my questions.
Thank you Kal.
Your next question comes from Vincent <unk> with Stephens. Your line is open.
Hey, good morning, Thanks for taking my questions I wanted to talk about the.
Add on products that you've been rolling out.
And so I guess the service contracts and additional things seems like you've had been having success there if I calculate that.
The non vehicles kind of revenues, you're generating but it seems to be about a $11 million this quarter. So.
If you could maybe talk about the uptake you're getting an add on products.
How much of your customers or are taking add ons and maybe.
Central.
Penetration rate once we maybe once.
You were able to expand that product.
Anything else that you're planning to do with the add ons. Thank you.
Yeah, our penetration rate for our add on products is as high as our customers see real value in these products.
And theyre priced at a value for it for them to increase success rates like we've talked about the new service contracts with the longer terms.
And the way, we have to defer and recognize revenue on those we'll continue to add to our revenue stream as we go forward and we bake in them you know the four two and three are higher priced contracts.
Okay, great. Thank you.
And then when you think about.
Kind of going back to your discussion on gross profit margins.
So your gross profit dollars continues to grow and it's been.
Nice to see you were able to to get some incremental value even with higher used car prices I'm just.
I should be thinking about that joined Ford or are there additional levers you can pull or sources of vehicles. So you've had I know in the past you've talked about.
Off rental vehicles.
But when you think about gross profit joined toward just kind of wanted.
I wanted to get your perspective on that thank you.
Yeah I think.
When the add on products get fully baked in that that should be a benefit we anticipate that being a benefit to the gross margin dollars and percentages as those products get truly.
<unk> rolled out.
So and then other areas.
In this business.
So consumers aren't that focused on the sales price, it's up to us to put customers in our market and.
In situations, where they can succeed in her equity throughout the contract terms. So we always have the ability to go in and tweak prices, but with a significant increase in costs out in the market.
We've.
Certainly seen an uptick in market share as consumers.
Looking at retail prices and looking at our prices in the market.
So are we.
We've oh.
We've benefited from having some very attractive retail prices out there that consumers are looking at.
Because of the price increases in the market.
And as a result.
Those percentages have come down a little bit, but as we go forward and get more clarity on where the market's going than we are we do have.
The ability to tweak our retail pricing, but we always have to keep in mind that our customer success rate customer equity.
And we are truly in the boat with our customers over that contract term and we're working with them to complete those those contracts and get title of the car and so we've got to look at.
All aspects of price increases.
And do what's right for our consumers, it's fantastic to see these.
Quarter over quarter increases in the gross profit dollars.
That we're making and we focus much more heavily on the gross profit dollars and we think that's the best focus to have here and it's been very strong.
Continue to look at pricing in dollars and in it.
Make sure were putting our customers in situations that they can succeed with.
In College, I think everyone knows this but you know the part.
Labor for mechanics, all of that stuff you know as increasing those costs are increasing and I kind of mentioned that we've done a really good job of controlling that part of our cost of goods sales. When you look at repairs and in recon to the vehicles that we're having to do so we're trying to trying to.
Minimize all of that in this inflationary environment.
Okay, great. Thank you so much.
Thank you Vincent.
Your next question comes from John Murphy with Bank of America. Your line is open.
Good morning, everyone. This is David Smith on for John.
The first question I have for you I think you alluded to it in your prepared remarks, but I believe we've got one child tax credit payment last this year, which is pretty important for your customer base. How do you think about the phasing out of that program or does he ended up without impacting customer demand in the next couple of quarters and you'll put out with all of them some transitory crusher.
On your business.
Well certainly.
Percentage of our customers that do benefit from that credit.
And that would certainly be a.
Cash flow event.
For percentage of our customers Bill tax time is.
Just around the corner.
And all of our customers do benefit from from tax time.
And again, we're trying to put customers in an affordable payment with an affordable downpayment.
Uh huh outside of tax credits or other events that happened throughout.
Throughout the year this is oh.
Again, we're in the boat with these customers and we're.
We're not depending on a child care tax credit.
Mt.
For them to be successful on our contracts but.
We are aware of that we're looking at that and monitoring that but at the end of the day.
It's not going to change the way we approach that.
Our customers and their success.
The tax time refunds are just around the corner.
And we expect our consumer base to perform well.
With or without these these additional chunk of credit Suisse.
Okay got it and then as we think about the variety of quite a lot of things right now, whether it's consumer credit metrics like all payments and Dave outstanding or if the financing metrics that you guys are reporting obviously, you're working off of some very abnormal levels from last year end.
And earlier this year, how do you think about normalization to pre COVID-19 levels and specifically.
Timeline, and then are there any initiatives in your business, where you think you can operate at more optimal levels in the future than perhaps you have in the past.
Yeah.
Well you know I'll start with just the normalization of used car prices and.
That's a little hard to pinpoint I think a consensus might say that.
We're gonna be in a period of a car shortages and higher prices through the end of.
2022.
At that point, we don't really see prices dropping off a cliff or decreasing.
Maybe they level off some so this week.
We've seen in the last 12 months.
Significant increase in costs, obviously and.
And we do expect.
Within a year or so for for the.
Prices to level back off and hopefully be more in line with general inflation as we go forward. This has been a very unusual period as you say, it's hard to know what normal looks like but consumers do need.
Cars, they need our service.
What we do is very unique in how we do it is very unique.
And we're putting customers in transactions that make a lot of sense for them and for us.
And as long as wages are going up and continue to go up to offset our inflationary pressures, which were seeing were seeing tremendous wage gains and the markets we serve.
We believe we're going to be able to put an affordable product out there for our customer and that customer is going to be able to succeed on those contracts.
Again, we expect a continuing price pressure and increases.
For at least another nine months, maybe another year and then we would love to see prices level off and be more in line with general inflation, but that's.
It's the question everybody is trying to ask is what does that normal look like when does when do things return back to a more normal level.
And but we'll adjust and be nimble and.
Always focus on putting our customer.
And a good solid transaction mechanically sound car with a payment amount that's affordable and then back up that a sale with fantastic service.
After the sale, we have a number of touch points. After the sale to keep customers on the road and give them peace of mind and dealing with America's car Mart.
And we were getting better every day and our customer support with some.
These investments were making to keep.
Our customers on the road.
If credit normalizes or if there's any changes we believe we're going to be in a great spot to help our customers succeed.
Okay and one more for me if I may and apologies if I missed this in the prepared remarks, but what is your current level of days supply that you're sitting without your dealerships and how does that compare to pre COVID-19 levels.
Yeah, we were a little over 60, right at 60 day supply.
And that's Uh huh, that's up about 25% from pre COVID-19 levels.
And we've been conservative in this market, we are we're carrying more inventory.
And the cost of that inventory is higher.
But if you see our dealerships they they're really all right. They are full of good.
Solid cars a good mix.
Product and we've been conservative in carrying more inventory just based on this the shortage of product and how long it takes to get product.
Two the locations repaired part shortages labor issues, so we're carrying a little more inventory.
On purpose right now than we would in a more normal period of more normal flow of product and we think that's the.
The best way for us to be looking at this short term, especially with tax time just around the corner.
Okay, Great. That's helpful. Thanks for taking the questions.
Thank you.
Once again, if you would like to ask a question. Please press star one on your telephone keypad.
Next question comes from John Rowan with Janney. Your line is open.
Good morning, guys.
Good morning, So if we continue to see price.
The increases for Amy you alluded to up to a year in used car market.
Do we should we continue to expect gross profit margin to continue to come down a little bit and then.
Subsequent to that when coal prices do level off is there still you know some potential weakness in the gross profit margin as you work through the inventory that you acquired.
You know as prices were accelerating.
Well again, if we're talking about gross profit dollars.
Dave.
Vintages Okay.
We're going to continue that's a constant analysis on our part.
And we will continue to look at that the service contracts and the other add on products as they roll in.
<unk> are expected to help us on the percentages certainly the dollars also.
But that's a constant analysis on our part to make sure that our retail pricing.
And our profit.
Percentages are appropriate to support our customer base also looking at what's going on in the market.
As we grow we've got to look at our other retail prices in the market and make sure we're in the neighborhood.
On that standpoint, so a lot of this is a little outside of our control as we try to gain market share, but there is a point.
That we need to and should and deserve and with all the work we do in investments. We make there is a level of gross profit dollars and percentages.
That would represent a levels that we need to stay at so we're very focused on.
Making sure that our pre.
<unk> is where it needs to be giving that consumer value and.
When prices level off.
Then they will make adjustments accordingly, there too but.
We're always looking at gross profit dollars percentages pricing in the market.
<unk>, new customers and customer success, so it's not.
It's not a one dimensional decision it affects all of our entire entirety of our business.
But we are looking at.
Where we can tweak what we can do to offset some inflationary pressures.
And keep our margins where they need to be.
Alright, thank you.
Thank you.
Once again, if you would like to ask a question. Please press star one on your telephone keypad.
Alright, there are no further question on queue.
I'll turn the call back to Jeff Williams.
Okay, well once again, thank you for listening to our call. This morning.
We've got a great company here at America's car Mart, we are we keep our customers on the road.
Give them peace of mind in a very stressful area of life and that's car ownership.
The investments we're making.
The initiatives we have in place are all directed at supporting our customers at ease.
Even a higher level keeping them in the family.
For life communities are better customers lives are better when they're part of the car Mart family.
We've got an extremely dedicated team and we.
We're all fired up about our place in the world our purpose and our why.
And we've got a fantastic outlook for our future, we're going to keep growing and getting better.
We appreciate your time this morning, and thanks again to all of our associates that do such great work in the field and at corporate each and every day so have a great day.
Thank you and that concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
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