Q4 2022 America's CAR-MART Inc Earnings Call

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Good morning, everyone. Thank you for holding and welcome to America's car Mart's fourth quarter fiscal 2022 conference call. This topic. The topic of this call will be the earnings and operating results for the company's fourth quarter and full fiscal year 2022, before we begin I would like to remind every.

One 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 Dot car Mart Dot com.

As you all know some of managements 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 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 ended April 32021, and its current quarterly reports furnished to or still 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.

Okay, well, thank you for joining us this morning.

We're very proud of our team and all of our great associates living out our mission vision and values in our daily work.

We give our customers peace of mind by keeping them on the road.

That's our purpose and we have an obligation to serve more customers.

As detailed in our press release, we had another outstanding quarter and year end.

In very difficult conditions.

We have a number of significant initiatives in process that are allowing and will allow us to continue to grow into the future.

Better utilizing data continuing to centralize certain functions and leveraging our scale as we move forward.

There is tremendous demand from consumers for our offering.

We have a lot of work to do.

The body of work is impressive we're now serving over 95000 customers.

Soon to be over 100000 and growing from there as we discussed in our press release.

Revenues over $1 2 billion.

Return on equity for the year was 21% and averaged 18% for the previous five years and return on assets was nine 5%.

With the previous five year average of nine 2%.

And looking back since we started our consistent.

Share repurchase program at the end of fiscal 2010, we bought back over six 8 million shares.

For $296 million.

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Our fully diluted share count.

We grow finance receivables to over $1 1 billion.

So in effect almost all of the $400 million and our total debt net of cash.

As a result of our share buybacks demonstrating the cumulative power of our focus on operating cash flows in this capital intensive business.

We will continue our investments in the digital and data areas as we move forward.

The investments are focused on inventory underwriting and sales and customer experience.

We have over 40 years of data that we're harvesting harvest.

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Our loan origination system.

Our CRM module.

And vehicle data efforts, specifically with <unk>.

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Accessible and actionable data.

This will help us add and retain more customers over time.

As managers and owners, we are interested in deploying capital at the best rates of return available.

The cash on cash returns of our business are attractive.

Even with the term at 43 months, which is substantially less.

Then competition.

First growing our customer base and increasing the productivity of our existing stores.

Is the best use of our capital.

Second acquisitions of well operated dealership groups.

Similar returns for our shareholders and provide an exit strategy for an owner operator and future growth opportunities for their associates.

We've developed a successful acquisition process.

Which works for everyone and were eager to speak with owners, who share our values and commitment to associate and customer success.

Third we repurchased shares below intrinsic value.

Additionally, we continue to add new stores, when we find the right combination of location.

Personnel and price.

Our opportunities for expansion and value creation has never been greater.

We believe that long term results will be consistent with or exceed those of the past.

Over the last five years.

We've grown our book value per outstanding share at a compounded 19% per year.

We've gone from $31 a share to $74 a share.

I'll now turn it over to Vicki to go over some numbers Vickie.

Thank you Jack and good morning, everyone.

We are pleased with the results for the quarter with productivity My dealership, that's $35 16 that second only to last year's fourth quarter at 36 and a half.

Last year's fourth quarter included a significant impact positive impact from the largest stimulus payment, which was disbursed in March of 'twenty one for.

For comparison to pre pandemic, the fourth quarter of fiscal year 19, with 33 units per dealership.

<unk> and increasing productivity per dealership and leveraging existing talent and facilities is moving in the right direction. We added over 7000 customers during the fiscal year.

For the current quarter net charge offs as a percentage of average finance receivables was five 6%.

Paired to four 8% in the prior year fourth quarter again, the prior year fourth quarter included the stimulus payments, which also positively impacted collections and net charge offs in the prior year.

Net charge offs were five 6% for the quarter ended at 431 26, 4% for the quarter ended 430 19 pre pandemic.

We believe we will continue to see some normalization of credit losses as we move forward.

However, we also believe that our investment in our customer experience area, our expanded service contracts and our focus of keeping customers on the road will keep us closer to the lower end of those historical ranges, we did see improved recovery rates in the fourth quarter as well at approximately 35% compare.

To 28, 5% in the prior year quarter.

Our account 30, plus past day was at 3% compared to two 6% in the prior year fourth quarter.

The average originating contract term for the quarter was 42, one months compared to $37 one for the prior year and up from 44 months sequentially.

Our weighted average contract term for our portfolio, including modifications was $42 nine months compared to 37 three for the prior year.

The weighted average age of the portfolio increased from approximately $8 two months to eight seven months.

Our total gross profit per retail unit sold increased by $855 68, 87, or 14, 2% compared to the prior year fourth quarter.

The gross profit percentage was 36, 5% down from the sequential quarter at 37, 8%.

Decrease primarily resulted from the increase in the average selling price coupled with the increased cost per repair parts transportation fees steel costs and other cost of sale expenses.

We continue to leverage the investments, we're making with our SG&A, we're now serving over 95000 customers.

An increase of more than 7000 and over 2000 total associates.

As an integrated sales and finance company. We also monitor SG&A as a percentage of total revenues less cost of sales.

And provision for credit losses, as a large part of our effort are focused on keeping customers in the family and lowering credit losses. This percentage was 53, 5% for the year ended 40, 30 22 compared to 57, 3% at 430 20 pre pandemic, excluding the impact of the.

The allowance change.

At quarter end, our total revolving debt was approximately $45 million and we had $6 9 million in total cash and approximately $198 million in additional availability under our revolving credit facilities, which was based on our borrowing base of receivables and inventory.

As we've previously announced we also completed our inaugural securitization just prior to quarter end with an initial $400 million in aggregate principal of asset backed notes.

It allowed us to diversify our funding sources with this nonrecourse debt and will provide us greater access to credit with a more efficient capital structure as we grow.

At April 30th our securitized notes payable was $396 million with $36 million in restricted cash related to those notes.

Our total current debt net of cash to finance receivables of 36, 1%.

During fiscal 'twenty, two we added $292 million in receivables increased inventory about 33 million repurchased $35 million of our common stock and funded $21 million in capital expenditures.

We will continue to focus on cash on cash returns a conservative balance sheet and investing for the future of a growing business. Thank.

Thank you and I'll, let Jeff close this out okay. Thank you Vickie.

In summary.

We are pleased but not at all content with sales volume productivity, even in light of the headwinds around higher car prices and consumer sentiment.

Collections and credit results are strong.

Investments will continue in areas to support a substantially larger business.

Even though we have a lot of work to do our support infrastructure, including centralization efforts have never been more solid.

Which will allow us to handle growth that we expect to come our way.

Rising interest rates and inflation will be addressed by us primarily with increased volumes and continuing efficiency improvements.

Yeah.

While we would prefer an environment with lower used car prices. We continue to believe that we will not see any drastic wholesale price reductions for our product over the short term.

However, as we have stated lower used vehicle prices would actually be good for our business over the longer term.

Again, our model has performed well in all conditions.

And to that point.

Results for us during the great recession were very good with some of our best credit results in history.

We're structurally in a much better place today, and we will be able to capture market share has created above us tightens up.

More consumers move down into our market.

We will now open it up for questions operator.

Thank you.

At this time the participants 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, if anything that may come up during the Q&A.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby as we compile the Q&A roster and once again that is star one if you would like to ask the question and our first question comes from John Murphy from Bank of America.

Your line is now open.

Good morning, everybody.

A first question on your state of your consumer I think in your in your press release, you said you don't have high consumer demand for your for your offering.

So it sounds like you have really strong demand, but we're hearing different things in different slices of the used car market and certainly in retailers I'm. Just curious if you can comment on the state of your consumer and Jeff can you just kind of alluded to credit tightening and maybe pushing consumers.

Down.

Into your slice of the used car market I'm, just curious what that could mean for for demand ultimately as well.

Yes, we are seeing good solid demand.

Especially with a higher credit type customer.

But at the same time, we're seeing some some challenges with volumes from an affordability standpoint.

So we do expect as car prices level off or maybe even come down just a little bit.

Affordability may be less of a factor for us, allowing us to pick up even more volumes, but we are seeing good solid demand.

From good credit risk customers.

And we expect that to continue.

We get some relief and have more room at those lower price points as we move forward.

Okay, and then and then to follow up on that I mean, if we look at your average selling price over the last two years, it's gone from no roundabout $12 and now we just finished up the quarter that was approaching $18000 I mean, 50% increase.

Just kind of mimicking what's going on in the used car market.

How does the business change and are you seeing.

Consumers coming to your.

To your used car lots as opposed to what you saw two years ago, because I mean, im just trying to understand what that structurally means for the business I mean, youre not expecting big feed in the near term.

That's a big step up.

Yes.

We we were actually moving up stream.

Stream on the consumer side before the pandemic before the big run up in car prices, we are really focused.

On keeping customers in the family for life.

So we were offering a nicer product at a higher price.

Prior to the run up in car prices so.

The 50% sales price increase is something that everybody is having to deal with.

And we're certainly having to extend the term to keep those payments affordable.

But payments have gone up.

The car prices have gone up.

We're dealing with that as best we can and we feel like we're in a better position than anyone to.

To keep those customers on those on the road keep those cars are in good shape serve our customer base at a high level.

But it has been at the cost of a longer term and a longer cash conversion cycle, but as we've discussed we expect.

Our returns.

To be at or above historical levels as we go forward with all the improvements we've made to the business.

Okay, and then just just lastly.

There is inflation in cost, particularly around labor would just curious how youre dealing with that directly.

And then also maybe for your consumer how much of a tailwind that is for wages.

You're increasing your help offset some of these rising costs. We just you just discussed.

Well, we certainly are aware of and adjusting to.

Inflationary pressures with our business in all areas.

Especially on the wage side and we are it's a continuous process for us to make sure that.

Our wages and benefit packages are competitive in our markets and we've made adjustments and we'll continue to make adjustments to stay competitive and retain our very best.

Associates.

Okay anything on that.

Yeah, we continually evaluate our wages and we always look for ways to be more efficient you know Jeff mentioned several of our CIS.

Systems that we're implementing.

And just a better efficiently use our data associates to be more efficient. So we are continually evaluating all of that.

And for US, it's all about continuing to gain market share served more customers sell more cars.

An increase that productivity to offset the effect of inflation.

Great. Thank you very much guys.

Thank you Julien.

Thank you.

Our next question comes from John Rowan from Janney Montgomery Scott. Your line is now open.

Good morning.

Good morning.

Jeff you make the point to lower prices are actually good for your business in the longer term what about like in the near term writer if prices come down.

You know what is kind of the initial reaction I mean, New York charge offs go higher as loss severity increases I'm kind of curious what the more immediate term impact is.

We don't think that's the key.

Car that we buy and supply to our consumers.

He is going to have much of a price reduction if any it's an eight year old car.

And the demand for that car mechanically sound car, that's going to last beyond that.

The contract terms.

We don't see that value decreasing anytime.

In the near to mid term.

But if it does.

It would have some effect on some current.

Results on recoveries in the <unk>.

On credit again, we don't need that to happen, but if it does there might be a short term negative but the positives on the other side would be would be much more and greater.

And the negatives on the front end in terms of affordability more consumers.

Qualifying for.

Contracts with us.

Overall, serving more customers.

Okay, and then you gave some guidance in the press release around credit.

You answered a normalized towards the lower end of the historical ranges you gave the five and 10 year charge off figures I'm curious are those the guide points that we're supposed to look for or.

Is it something else that we're supposed to look at.

Well if you just go back and look at the range the range that end up with those averages.

With the improvements we've made to the business centralization efforts.

More better structurally than we've ever been on the support side.

So.

There's a lot of unknowns in terms of what normal credit losses are going to look like.

But to us.

We think it'll be.

Closer to the lower end and the higher end of those ranges as we go forward.

Okay, and then any guidance on the gross profit margin going forward. Obviously, there was a dip down in the fourth quarter.

Do you think it continues to migrate down or.

You know, which car prices at least stable here do you think you'd keep inventory.

Percentages relatively the same in your gross profit flat. So I'm just trying to gauge that.

That number stays flat comes down or even improves.

I think a big piece of that will depend on the.

Market and the used car prices again, our guideline pricing is set based on our purchase cost.

So with purchase prices continue to increase it does put more pressure on that gross margin percentage the dollars improve the percentage become lower.

If prices stabilize them, then that gross margin will stabilize as well.

And again this quarter, we did see some inflationary pressure on some of the fuel and transportation as well.

Okay.

Primary change was due to the pricing now.

Okay. Thank you.

Yep.

Okay.

Thank you.

And if you have a question that is star one again, if you'd like to ask a question that is star one.

Yes.

And I am showing no further questions I would now like to turn the call back over to Jeff Williams for closing remarks.

Okay, well once again, thank you for joining us. This morning. Thank you for your interest in America's car Mart.

We'd like to say, thank you to all of our associates.

Dedicate their.

Their lives to helping our customers succeed.

We've got a great group of associates.

A lot of momentum as a company.

We're in a great spot as we look forward so thanks.

Thanks, and have a great day.

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

Thanks, Paul.

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