Q3 2023 America's CAR-MART Inc Earnings Call
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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Good day, everyone. Thank you for holding and welcome to Americas.
Car March 3rd quarter fiscal 2023 conference call. The topic of this call will be the earnings and operating results for the company's third quarter of fiscal year 'twenty to 'twenty three before we begin today's call is being recorded and will be available for replay for the next 12 months as a reminder.
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.
Company cannot guarantee the accuracy of any forecast or estimates nor does it undertake any obligation to update 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 32022, and it's karri.
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 Chief Executive Officer, Doug Campbell, President 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.
We saw an increase in unit volumes for the quarter, both on an absolute basis and on a same store basis and they had some weather challenges, but have seen more unit volume increase which Doug will cover sales for the quarter in just a minute our volume increases are in the face of affordability challenges.
Overall inflationary pressures.
And when compared to the previous two years of lack of stimulus in the marketplace. However, overall used car prices did come down in 2022.
As expected we are seeing a normal tax season uptick in the most recent months, but we do expect pricing to level off in the short term and.
An experienced more gradual normal decline for the balance of the year. The car. We do buy is expected to better whole value due to supply demand the affordability dynamics.
Customers wages are expected to continue to rise leading to improvements in affordability and higher future sales volumes. We expect that used car affordability will shift back to historical levels over time, bringing with it an increase in customers seeking credit and the outstanding service they receive from America's car Mart.
According to Cox automotive access to auto credit tightened again in January reflecting conditions that were the tightest since June of 2021 for all loan types. There was a slight loosening for the independent dealer channel in January from December , but on a year over year basis, all channels were tighter with credit unions tightening the most.
We will benefit as good folks migrate down into our market.
Timing of our loan origination system rollout, which we will discuss more could not be better picking up market share and setting ourselves up to sell between 40 and 50 cars per dealership per month over the next three years and to eventually average over 1000 active customers per dealership.
Doug and I will cover a few specifics on some key initiatives.
The people. The recent addition of several talented people to our senior management team is allowing us to benefit from their skills and outside experiences.
I guess effectively complete and leverage the initiatives and investments that we've been making in the business.
We're improving processes, increasing accountability and reorganizing work to maximize efficiency as we've discussed areas include procurement and inventory management wholesale improvements reconditioning logistics the loan origination system.
Data and digital and we're making huge strides in all these areas very exciting.
Our enterprise resource planning or ERP initiative is progressing and is expected to be completed by the end of the calendar year.
ERP is critical in our efforts to eliminate manual tasks and improve efficiency and operating flexibility, allowing for future growth within.
Within the ERP is the customer relationship management module or the CRM the.
<unk> development of the CRM will allow us to harness visibility of customer touch points at one place.
Proving the customer experience, allowing us to serve more customers at a high level, while increasing the funnel of potential new customers.
<unk> provides the underpinning of our new loan origination system.
This investment is critical to allow us to become a data driven company better supporting field operations teams as they serve our customers.
As mentioned in the press release, we completed the acquisitions of three new dealerships in December . These dealerships are located in Knoxville, Tennessee and in Tyler, Texas, Great talents.
We expect acquisitions to play a leading role in our future plans and we're actively talking to multiple parties. We believe we can add five or more dealerships per year via acquisitions with our current resources and more as we look forward and refine our processes.
I'll turn it over to Doug Doug, Thanks, Jeff and good morning, everyone.
Cover two more initiatives before providing some color on our sales performance.
Our reconditioning pilot is moving along nicely and we're processing several hundred vehicles per month now with strategic partners, who have footprint in our trade territory.
We've been pleased with the results, thus far and are seeing cost reductions and quality improvements when compared to other channels. Our expectation is that within six months, we'll be processing north of a 1000 units per month utilizing this channel and we'll continue to scale it as needed.
At maturity, we see a scenario, where we could source, 50% of our vehicles utilizing this channel or.
Our preliminary findings indicate the effort is worth three to $500 per unit. However, the indirect benefits are enormous and will allow us to grow sales and volume productivity.
Next I spoke a fair bit regarding our new loan origination system on the last call, where I outlined that we had successfully installed the credit application portal throughout 23% of our stores. Our original goal was to complete the balance of the installation by may 1st.
I want to take the opportunity to thank all of the teams who have worked tirelessly on completing the installation and now 100% of our operation as of February one.
All customers, who apply online are receiving text message responses as to the status of their application, including down payment requirements and what they are qualified for.
Customers, who replied to these messages are interacting with team members here at headquarters on follow up questions and appointment setting needs any customers, who require more time cascade into a different workflow, where one of our stores will ensure that work alongside them until they are ready to purchase.
We're currently prioritizing what functionality to deploy for our dealerships and consumers that will enable a more frictionless transaction.
I'd also like to discuss credit application volumes, which is one of the larger issues. We were trying to address with the <unk> initiative or.
Our customers have been and continue to engage with us differently. The submission of the online credit application is a great indicator for customers and their propensity to buy and the demand for our services.
Prior to Covid, we have begun seeing that shift, but it has accelerated throughout the pandemic and continues to do so.
Historically applications that were done at our stores exceeded the applications performed remotely. This has been a slow shift but approach to ratio of one to one just prior to COVID-19.
However, currently that ratio now favors remote applications versus in store applications at a ratio of two to one all of this has transpired while gross credit application volume from the two channels has grown over 25% when comparing the monthly averages from 2019 and 2022.
If we isolated the results from the pilot stores compared to the rest of the company. The results are even greater.
It is notable that this was achieved with no incremental marketing spend there are more customers and we can serve and it's important that we serve them in a differentiated way.
Hey, Doug those are great points I'd like to add a few others to consider.
<unk> will allow us to streamline underwriting, including credit reports and income verification and eliminate the manual processes and capture documents more efficiently than we have in the past.
The opportunities around regression analysis marketing and data mining are huge. In addition, we will also be leveraging a third party to perform tax NPV calculations, which has historically done has been done by internal resources.
Those benefits are both better efficiencies and cost savings and the total capex for this.
This initiative is very minimal with ongoing incremental cost of around $13 per unit sold.
Hugely positive all the way around.
Vicky those points really underscore the importance of the initiative.
I'll take a moment to provide some additional color on sales we finished the quarter with a little over 14500 units as Jeff mentioned earlier, the adverse effects from weather had an impact on our operations team.
There were a couple of weather events during the quarter, but I'll limit my commentary to the event that took place in late January .
Most every store was impacted in some way.
But over half of our stores were located in areas, where a state of emergency has been declared.
During this period, we requested our leaders to prioritize the safety of our associates and our customers by providing adequate time to hunker down and to return to work when it was safe to do so well.
We believe this event had a drag on our sales volume for the quarter of roughly 3% to 400 units, which impacted our pre tax income by about $1 million absent that impact our sales performance versus the prior year would have been up about five or 6% versus the two 7% positive that we finished the quarter with we're very proud of our leaders and associates for navigating all of these challenges.
And still finishing the quarter on a positive note.
When looking at the average selling price it was up 8% or about 3500 $41 when compared to the same period last year, we continue to manage the issues in any industry regarding affordability and supply change some of it is reflected in our sales price when comparing the average selling prices of vehicles sequentially, they're relatively flat. Additionally.
As a reminder, we made some decisions as a management team in the prior quarter to increase the selling prices of vehicles and ancillary product.
The average selling price for the first time as they went into effect in mid December last.
Lastly, I'll cover gross margins, we finished the quarter at 33, 6% and on the prior call. We mentioned wholesale performance, having a negative contribution on these gross margins by approximately 200 basis points. While there is much we can and will do to improve the margins as a general statement the quickest way to add some benefit here was to essentially manage the sale of <unk>.
Wholesale vehicles.
During the quarter, we ran a pilot on a subset of wholesale volume, which got us a healthy bump in retention prices. That's reflected in the 147 basis point improvement you see here sequentially.
Given the wholesale volumes for us as a company have hovered around 20000 units a year and have been for about the last five years or so this represents a huge opportunity when you annualize that benefit will be continuing to scale the pilot and anticipate the entire company benefiting from this over the next couple of quarters now I'll turn it over to Vicki <unk>, who will highlight our financial results.
Okay.
Thank you Doug.
For the current quarter, our net charge offs as a percentage of average finance receivables were five 9% relative.
Relatively flat sequentially, but also flat compared to the pre pandemic third quarter fiscal year 19.
They were slightly above our prior five year average of five 6%, but still below our 10 year average of 6% for third quarters. The primary driver of the increased charge offs was an increased frequency of losses, but we also experienced an increase in the relative severity of losses the.
Mining wholesale prices also had an effect recovery rates decreased to about 28%.
As Doug discussed we will be focused on maximizing our efficiencies around the wholesale process to offset a piece of the declining market impact we are focused on keeping customers and their vehicles as always but especially working with them during the upcoming income tax refund time.
The quality of the portfolio remained strong with applicant quality consistent with prior year, we continue to improve the percentage of the portfolio held with our highest credit quality customers.
Currencies have remained in line with historical percentages and are trending positively over the prior year.
Our accounts 30, plus days past due was at three 7% compared to 4% in the prior year quarter.
This is particularly notable this year's quarter and was on a Tuesday, the highest delinquency day on average versus the prior year quarter, which ended on a Saturday the lowest delinquency day on average.
Total collections were up over 11% to 153 million and total collections per active customer per month or up five 9% to $519.
The average originating contract term for the quarter with 42, and a half months compared to 44 for the prior year quarter and down slightly from $42 six months sequentially.
As Doug mentioned, the average selling price was up 1300 $41.
For the quarter versus the prior year quarter with only a $2 one month increase in the term compared to the prior year third quarter. It is encouraging that the originating terms and the average retail selling prices increases are flattening.
Our weighted average contract term for the entire portfolio, including modifications was $45 four months compared to 41, two for the prior year quarter.
And positively the weighted average age of the portfolio increased 12, 5% from approximately $8 eight months to nine nine months.
Our SG&A spend increased $5 6 million over the prior year quarter. Most of this increase relates to the investments in our people both the costs for the new key positions and our focus on staying competitive in terms of total rewards and compensation for our valued associates.
Increased collection costs due primarily to the higher frequency of repossession. The addition of three new dealerships since last year and the inflation impact on nearly all expenses also contributed to the remaining increase.
Many of the long term investments, we're making are reflected in the income statement as we centralize certain non core functions.
As we complete our initiatives that Jeff and Doug discussed, we will become more efficient be able to increase sales volumes and expect to leverage our SG&A cost.
Our customer count increased by 6% over the prior year to 99577 customers. We continue to believe we can serve a much larger customer base with appropriate return our expectation is to leverage these investments by serving more customers.
At quarter end, our revolving debt was approximately $27 8 million.
$4 3 million in cash and approximately $148 million in additional availability under our revolving credit facilities based on our current borrowing base of receivables and inventory.
We closed on our second securitization at the end of the quarter issuing $400 million in bonds with a weighted average fixed coupon of eight 7% and our total securitized nonrecourse notes payable was $588 million was $61 million of restricted cash related to those notes.
Our total debt net of cash to finance receivables ratio is 42, 2%.
Thank you and I'll, let Jeff close this out okay, well thank you Vicky.
Obviously, we're very proud of our company.
Wanted to take and give you a perspective on where we are where we've come from in the last three years and most importantly, where we're going.
Since January of 'twenty, our book value per share has grown from 44 to $78. That's a 77% increase while equity has gone from around 290 million to almost $500 million.
This in an environment, where the average retail sales price has moved up 50% and inflation in all other areas of the economy has increased the cost of doing business.
For many years, we've talked about the need to hold on tight to our conservative balance sheet with historical debt to <unk> of around 30% or less so.
So that we would be in a great position to accelerate growth when conditions moved in our favor.
The pandemic, resulting stimulus and the return of inflation with higher interest rates presented such an opportunity to us and we've taken advantage our debt net of cash is 42% extremely healthy.
The increase can be looked at as representing a one time investment and moving our book from 32 months to 45 months with the increase in car prices plus additional investments in the initiatives that we have funded.
Investments have been made to position the company to come out on the other side of this historic period in better shape with more opportunities that we had and we had going in.
These investments are individually and collectively heavy lifts, but are all necessary for us to reach our full potential and to be the company that we all want to be.
Also as Vicki mentioned, a significant amount of our current investment in SG&A is long term focused to be leveraged over time.
Our business model is time tested and with the improvements, we're making the best way to serve our customer base.
All in cost of ownership from a consumer standpoint is in most cases better than competitive offerings, when considering our shorter terms and lower interest rates.
The fact that our repeat business is now over 50% is an indicator of how strong the model is and the model is getting stronger every day, what we do is essential and we have an obligation to serve more customers, who deserve the peace of mind, they get from being part of the car Mart family.
We expect the cost of vehicles to flatten in term to flatten as well with consumer affordability in our cash flows to improve as we look ahead.
We will be gaining significant significant efficiencies in the inventory management area and expect annual turns to materially improve above pre pandemic levels.
Going forward as we stated in the press release over the next three to five years, we expect to generate returns on equity at historical levels by increasing volume productivity, improving gross margins as a function of procurement initiatives.
Leveraging SG&A and through acquisitions of well operated dealerships.
We expect our cash on cash returns to not only produce an increased dollar return, but also percentage returns in line with historical results the cash generating potential of our business is strong.
We will continually review of our organizational and cost structure and make changes proactively to put our company in the best position.
And finally, the consumers we serve want to hear yes.
And the lowest has decided to give them a yes from the comfort of their homes minimizing the sometimes unpleasant part of the car buying experience.
Allowing their time at our dealerships to be focused on are kicking tires, and taking test drives and getting in and out quickly.
Our ability to provide a sufficient quantity of quality vehicles with affordable payment terms as our biggest opportunity and will set the baseline for where we take our company.
The demand for our offering is high and we will continue to increase over time.
We are confident in our ability around procurement and inventory management.
Very excited about our future.
As always I'd like to thank all of our great associates for their dedication to our purpose and for all they do every day to keep our customers on the road.
Thank you and we will now open it up for questions operator.
Thank you.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby we compile the Q&A roster.
And we ask that you limit yourself to one question one follow up again, we ask that you limit yourself to one question one follow up and one moment for our first question.
And our first question comes from John Murphy from Bank of America. Your line is now open.
John Your line's on mute could you please mute it.
One moment for our next question.
And our next question comes from John Rowan from Janney. Your line is now open.
Good morning.
Great. Good morning, So I was wondering I drill down on duration a little bit so.
The originating duration is relatively flat sequentially actually down a little bit sequentially, but the effective entire portfolio duration was actually up sequentially and up year over year.
Zooming that this is due to higher modifications is that is that correct.
Yes, we did have slightly higher modifications.
This quarter.
Not anything out of.
Ordinary range, but certainly a time for us to continue to work with our customers certainly as we approach the income tax refund season as well okay.
John might relate to the fact that the average age of the entire portfolio up 12, 5% to.
$8 eight months to nine nine so that's going to SaaS. The overall age of the entire portfolio, which is representative of.
Just the.
The increase in agent turn.
All right.
And then if there were some increased modifications did that have any impact on delinquencies. I mean, you did give a lower delinquency number 30 days year over year, but in the press release it shows the average.
Our the total current portion of the portfolio was down year over year. So can you just compare the two one going up one going down and whether or not modifications had any impact on those thank you.
Yes, I mean, they would have some impact again, our modifications were not.
Outside our normal range.
Pretty pretty consistent with where we usually see modification.
Okay alright, thank you.
Yes.
And thank you.
And one moment, our next question and if you would like to ask a question that is star one one again, if you'd like to ask a question that is star one one and one moment our next question.
And our next question comes from Vincent <unk> from Stephens. Your line is now open.
Hi, Good morning, Thanks for taking my question. So first question is a broad one one I've been getting a lot from investors but.
If you could maybe talk about what you think would be a right post pandemic.
Annual earnings run rate.
So you have 22 SaaS of EPS for this quarter.
Census for fiscal 'twenty 'twenty four is about $5 35, so just wondering.
What you think.
Kind of annual earnings should be when we think about post pandemic number and then how.
We get from this quarter or two to where you'd like to be kind of on a run rate basis going forward. Thank you.
Yes.
Yes, as we mentioned in the.
The press release in the comments earlier.
We do expect to return earnings to.
Return on equity more in line with historical results pre pandemic.
To do that all the initiatives in place on volume and productivity improvements gross margin improvements expense management and better credit results should should get us there over time, but currently adding a lot of reserves to the balance sheet on the credit reserve.
Syed cash on cash returns for us look very healthy and we expect over time again as we mentioned.
Dollar returns and percentage returns to be in line on a cash on cash basis with historical results. So we're optimistic.
What we're doing and the initiatives in place.
Productivity improvements will come along nicely.
Get us in a spot within three years five years to get ROE back.
Closer to historical levels.
Okay, perfect so like historical.
Metrics are sort of.
You think we can get back to that or even.
Improve from that level is that is that fair from your comments.
That would be yes that would be our intention with all the investments we're making in the business.
Okay, great. Thank you and my follow up so a more specific question just about the inventory so.
I appreciate your comments on the press release about that inventory levels.
We're getting back to two.
Back to.
Historical levels.
But if you could talk about what's the average aged inventory.
And are we pretty much done from this point or maybe after tax refund season were done from this point in terms of.
Inventory normalization.
I think we've worked through.
Good percentage the majority of our inventory challenges there is some lift.
To work through.
But we are getting there making progress fully focused.
On improving efficiencies and inventory turns and working through.
Some product that has been acquired over the last year or so but.
I would say.
Well on our way and we're not fully finished yet.
Making good progress.
Yes, I'd add.
The inventory that we're sourcing out of this new channel as it starts to make its way through the <unk> ecosystem.
So have a benefit there.
Wholesale.
I will call the centralized wholesale selling.
That to be accretive.
Margins that we'll have going forward too so that's that's exciting as well.
Okay, Great I'm, sorry did you have.
The days.
Aged inventory I think last quarter. It was in the mid or high Fifty's just wanted to have that comparison. Thank you.
That was total.
Days inventory and.
Days sales in inventory, that's relatively flat with what it was last year I think the aged inventory has come down we are making progress again.
Worked through most of it we have a little work to do there.
Okay got you thanks very much.
Thank you.
And thank you.
And I am showing no further questions I would now like to turn the call back over to Jeff Williams for closing remarks.
Okay again, thank you for listening in today appreciate your interest in America's car Mart.
And again, thanks to all of our associates out there for all they do to keep our customers on and have a great day. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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