Q3 2024 America's Car-Mart Inc Earnings Call
Good day and thank you for standing by welcome to Americans America's car Mart third quarter fiscal 2024 results conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during this session.
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Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Vickie Judy Chief Financial Officer. Please go ahead.
Thank you good morning, and welcome to America's car Mart third quarter fiscal year 2024 earnings call for the period ending January 31st 2020 for join.
Joining me today is Doug Campbell, our company's president and CEO.
We issued our earnings release earlier this morning, and it is available on our website along with the slide a supplemental material. We will post a transcript of our prepared remarks. Following this call and the Q&A session will be available through the webcast after the call.
During today's call certain statements, we make may be considered forward looking and 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 provision 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, including important cautionary notes. Please see part one of the company's annual report on Form 10-K for the fiscal year ended April 32023, and our current and quarterly reports furnished to or filed with the Securities Exchange Commission on forms 8-K and 10-Q.
I'll now turn it over to Doug for his introductory comments about our third quarter.
Good morning, and thank you for joining us and for your interest in our company.
I mentioned in our earnings release that sales volumes fell short of our internal expectations during the quarter.
There are times when the results you produced don't align with the level of effort where output and this was one of those quarters.
I want to acknowledge the hard work of our associates because they do so much to take care of our customers and keep them on the road very appreciative of the effort put out by the team.
I'll start by highlighting some of the positive items that occurred during the quarter and discuss more in detail the drivers of the sales decrease.
Last quarter, there was speculation about direction of the credit loss and whether it would continue to degrade flatten or even improve.
Our associates have worked tirelessly to assist our consumers and navigating an ongoing challenging environment throughout the quarter, we reduced the number of unit losses taken when compared sequentially by 9%.
As the industry backdrop delinquency trends worsened throughout the quarter. However, we improved our 30 plus day delinquencies by 30 basis points. This drove a 3.3 dollars $9 million favorable adjustment and the provision for credit loss.
We've now completed the planned rollout of our loan origination system as.
As with the implementation of any large scale system that is built on changed management. There were some challenges in getting it fully in place, but we're happy that those implementation challenges are now behind us.
We now have two quarters with the west originations driving more money down stronger consumer profiles and short in term lengths.
Let me make this point clear the yellow vest as a game changer for car market and we're really excited about the system, leaving its imprint on the fourth quarter and into the future.
As mentioned in the press release, we also entered a strategic partnership with Cox automotive, which will aid in vehicle movement repairs acquisitions and remarketing our car.
This more in detail, but let me start with revenue and sales revenue was down seven 9% for the quarter driven by several factors.
A 19, 6% decrease in unit volume was the primary driver.
Overall industry softness accounted for roughly half of that.
Recall that in our second quarter report, we said that August and September volumes were up or flat with October contributing to the decline.
October trends persisted into the third quarter with overall application volume softening by eight 3%.
The Los implementation challenges mentioned, along with balancing volume and deal structure also contributed to the decrease.
The benefits of system updates to the otherwise along with an augmented marketing plan for the fourth quarter are expected to win back some volume and deliver stronger outcomes.
We also had two fewer selling days in the quarter because of holiday shifts our stores were always closed on Sundays, but the shift in days for Christmas day, and New year's day lending on a Monday added two more closure days for the quarter when compared to the prior year's quarter. Additionally, there was severe winter weather in January which necessitated closures of up to three days at roughly a third of our 100.
<unk> 54 dealerships in January which kept consumers from shopping.
These revenue headwinds were partially offset by a 16% increase in interest income and a seven 5% increasingly average retail sales price that increase in the average retail sales price was driven equally by a mix of ancillary products sold in vehicle price.
You'll hear more from Vicki on the specifics on the yellow vest here in a minute, but let me comment on the results of these deal structures.
The credit losses that we're seeing on our loan originations are very positive when compared to the legacy system.
However, I want to caution these results are very preliminary in nature.
But that is rapidly changing with now 10000 originations performing materially different than the levels generated by our legacy system.
We plan to share more specifics in the future.
But where it's like substantial and material come to mind, let me start to quantify their effect on both the frequency and the severity of loss.
We've mentioned numerous times the importance of acquisitions and.
And it being one of the strongest uses of capital for our company.
Good to announce that the purchase of central Auto and Hot Springs is complete and we're actively pursuing other opportunities that we expect to close in the calendar year.
I want to provide more detail on this critical initiative that we teased out in last quarter's report.
As noted in our release. This morning, we've entered into a strategic partnership with Cox automotive to aid in driving efficiencies within our vehicle supply chain process.
I personally have a long history with Cox and their leadership team across several organizations.
And driving large scale projects that have driven tremendous value.
We've begun to leverage their digital and physical assets as well as certain logistics services.
This initiative will be essentially manage removing the day to day burden of processing.
And overseeing the disposal and reconditioning of assets from our operations team strategically.
Strategically we expect this tool our dealership teams to have more time, selling and helping customers navigate vehicle ownership.
We believe this partnership will help address some of the affordability challenges that exist in our industry and we expect it will lead to greater value creation for our shareholders and customers alike.
I'll now turn it over to Vicki to cover more details on our financials.
Vicki: Thank you Doug.
Vicki: In my commentary the comparisons that I will cover will be the third quarter of 2024 versus the third quarter of 2023, unless otherwise noted.
As Doug mentioned LLS has allowed us to improve upon our deal structure with average down payments for the quarter trending up 30 basis points to five 1% also up sequentially by 20 basis points.
Vicki: Our originating term was 43 three months.
Vicki: Crews from $44, one month sequentially and for the second quarter in a row.
They were up from 42 five months compared to the prior year third quarter.
The weighted average total contract term for the portfolio is at $47 six months, including modifications.
The average age of the portfolio improved to nearly 12 months or almost.
Vicki: Two months better compared to last year.
Our total collections increased nine 3% the monthly average total collected per active customer rose to $540 from $519. This metric also improved sequentially. We originated contracts in the third quarter that are expected to produce cash on cash returns of over 66%.
And an IRR over 41%, we provided a table in the earnings release and the supplemental chart on our website that demonstrates our positive cash on cash returns over time.
This data reflects our history of earnings strong cash on cash returns and various market and macroeconomic conditions were very focused on quality of origination and deal structure to maximize these returns and ultimately our profitability.
Vicki: The gross profit dollars per retail unit improved 10, 5% and the gross profit percentage increased 50 basis points compared to the prior year quarter, primarily due to improved pricing discipline and repair expenses.
There was also an increase in profit dollars sequentially and we expect further improvements in our gross margin as volumes rise and we have more affordable vehicles in our supply chain from the initiatives underway.
Vicki: Net charge offs as a percentage of average finance receivables were six 8% versus five 9% last year and down sequentially 40 basis points. We were pleased with this especially when considering the sales decline.
We experienced an increase in the frequency of losses compared to prior year, which was about 55% of the increase as well as an increase in severity.
Severity continues to be impacted by the longer term links although that has begun to stabilize recut.
Recovery values for the quarter were approximately 24%.
Accounts over 30 days past due improved in Q3, dropping 40 basis points to three 3%. This was also a 30 basis point improvement sequentially.
Our customers continue to face ongoing pressures related to the increased costs for housing energy childcare auto insurance, however, that slightly offset by lower inflation and some groceries and fuel.
Vicki: Sequentially the company decrease the allowance for credit losses from 26.04% to 25, 74%, resulting in a benefit of $3 $9 million to the provision.
The key drivers of the adjustment were lower delinquencies at quarter end and a lower overall inflationary outlook.
In summary, the improvements we've made in deal structure, the higher average age of the receivables portfolio lower delinquencies and our operational initiatives are expected to lead to better customer success and lower credit losses in the future.
Moving on to SG&A.
<unk>, we were able to lower SG&A dollars by $1 3 million. The steps we took in the second quarter to reduce expenses contributed to the sequential improvement was slightly offset by increased collection costs related to repossessions.
Vicki: Our SG&A per average account was down six 7% from $451 to $421. We're very focused on cost efficiency, while continuing to serve over 102000 customers and providing quality service.
Vicki: Interest expense as a percentage of sales increased to 7% for the quarter compared to three 6% in dollar terms interest expense increased $7 million due to increasing interest rates and an increase in average borrowings of approximately $145 million over the prior year.
Our funding and financing program remains strong in December we called our 22, one notes and paid them off during the quarter in January Kroll upgraded all tranches of our 23, one notes and the company completed its fourth securitization at the end of the quarter issuing 200.
$50 million in bonds with a weighted average fixed coupon rate of nine 5%.
In February we renewed and extended our revolving credit agreement to September of 2025, with a $340 million revolver, along with access to a $100 million accordion feature.
At quarter end, we had $4 2 million in unrestricted cash and approximately $126 million in additional availability under our revolving credit facilities based on our borrowing base of receivables and inventory.
Access to capital with our revolving credit facility and a successful securitization program gives us flexibility and a distinct advantage over many competitors our nonrecourse securitized notes represent the bulk of our funding and our cost of funds fluctuate with the level of interest rates and credit spreads.
We remain committed to growth thoughtful capital allocation and financial management, as well as improving profits and shareholder returns.
I'll, let Doug close this out thank.
Thank you Vicky.
<unk> is off to a better start than last quarter, we're closely monitoring our consumer and the tax season.
Actual refunds are up slightly year over year, but they're running a little bit behind last year.
Affordability continues to be the biggest challenge in our industry. We're all competing for similarly priced assets to provide customers with reliable and affordable transportation.
Initiatives like the ones that we put in place will aid in addressing these issues and enhance our ability to grow as a company.
We do have near term challenges that we're addressing such as striking the right balance between loan origination volumes and our cost structure.
We reported progress in the third quarter on key metrics, including gross profit credit losses, and loan originations and we expect to make additional profit progress on these and other areas. We believe that our agility and underlying cash generative nature of our company continues to position us for long term profitable growth.
We're bullish about commerce future, because our initiatives will be accretive to earnings and shareholder returns.
We'll now open up the line for questions. Operator, please provide instructions to do so.
Vicki: 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, one moment, while we compile our Q&A roster.
Vicki: Yes.
Vicki: And our first question is going to come from the line of John Murphy with Bank of America Securities. Your line is open. Please go ahead.
Hi, good morning, guys.
Just a first question Doug.
John Joseph Murphy: And Judy if you want to comment as well.
When you look at this you are basically transacting in vehicles that are approaching $20000 before and pre COVID-19 there were 10000.
I know Theres, obviously major inflation in used vehicle pricing, but can you talk about sort of the challenges and opportunity and what that really means because that really is.
You had some very potential big implications for how the business is run and performance over time.
And will it go back down over time.
Yeah, Yeah I appreciate the question John and good morning. So.
I think youre spot on this is it.
A variant of a question, we got last quarter, but I'll try and answer it slightly differently.
That 19019 5000 of our cars trend.
Equals about a $570 payment today in terms of origination payment.
John Joseph Murphy: Look at that and you start to deconstruct that.
A lot of that is price a lot of that is what we've done with service contracts, which have improved over time, and our debt cancellation product, which as a percentage of the transaction price. If we even went back just a year ago and said Hey, let me normalize for what the management action items Im taking price increases and adjustments to these items.
Payment is actually today less than what it is a year ago, if I take away some of these management execution items in.
In addition to that we believe car prices were coming down although although.
Indicators are pointing in the right direction for our prices to come down in the balance of year. How quickly that that is sort of a question mark around how quickly that comes down but I think the back half of the year is really going to provide some relief for us and our consumers. Additionally.
The initiatives like the one we mentioned with Cox automotive is going to go a long way in aiding us getting there faster and not so reliant on the marketplace to get there.
John Joseph Murphy: Our ability to recondition and repair more vehicles to resell.
Inexpensive way is going to help us drive down that price and we think we can do that in fairly short order.
Okay and that just leads to a second question can you can you talk about what exactly <unk> is doing and when you get into recon. There's also two questions of what level. Your recon too I mean, you guys are regarding a three year old vehicle you want to get close to new but if youre regarding.
Something that's closer to a 10 year old vehicles, there's a lot of questions as to where you reconstitute. So youre outsourcing that how do you how do you make those decisions efficiently and how much money can you save and what kind of increase in throughput could you get ultimately per store as a result of this.
Speaker Change: Great question. So today, when we look at the business and we have partners that help us they are helping us on a store by store basis, and so you can imagine those agreements for repairs or written up sort of one off and low volume. When you have a large scale partner, who has a footprint that aligns closely with your footprint and you can start.
To negotiate labor rates and parts rates.
Body repair rates at more commercialized terms for a player our size I think theres still savings to be had and improve and drive a nicer product in the end and so that's our goal.
Speaker Change: We think there is a tremendous opportunity to do that we're not trying to repair cars and make them like new vehicles, we have a standard and we've been working closely with the Cox team over the last 90 days to get them up to speed on what that standard is.
Okay, Great I got a few more questions, but ill drop back in the queue. Thank you very much.
I appreciate it John Thank you.
Thank you and one moment as we move on to our next question.
And our next question is going to come from the line of John Rowan with Janney Montgomery Scott. Your line is open. Please go ahead.
<unk>.
My apologies if you went over this already but can you kind of deconstruct the declining unit volume I know, obviously you mentioned weather.
Couple of.
A couple of missing days and kind of the timing of sales days in the quarter, but.
So just looking at.
The decline in unit volume relative to the reduction in <unk>.
Duration.
Did that have a material negative impact on sales and also whether or not there was anything being driven by any changes in the competitive environment. Thank you.
Good morning, John.
John Joseph Murphy: And no no one sort of asked so I'll try and reiterate some of the key points in that a little bit more color. So we mentioned the environment was generally softer we thought that was about half the decline if you look at other <unk>.
Competitors other public retailers, all reported being sort of down single digits, some double digits and so if you take that as a proxy that's part of it. The other portion we mentioned comes from weather and we had some closure days there too I think the biggest driver there is traffic and so.
We've gone and been on record about the ability to drive excuse me application volume and Thats been really healthy. That's the first time, we've seen a decline but more importantly was that was the type of channels. So when we give you that sort of report out on traffic, it's an aggregated view of floor traffic and online traffic in.
What we call our application track record on ipads, we can see customers, who are walking into stores and so some channels declined stronger than others other ones actually had improvements.
And we know some of that is driven by marketing and the way we've sort of run the business in terms of the LLS and so.
To your point, we opened up term slightly from the prior quarter to eight and driving some more of that traffic. We also made some more iterations and adjustments and get it getting ready for the fourth quarter. That's what gives us some confidence that we can win back some volume in February as any indication that some of those changes are working so.
Okay.
You Wouldnt attributed you wouldn't attribute the change in traffic to competition.
No, we're really not seeing that I wouldn't I wouldn't I.
I wouldn't say that that's a.
Major contributor at all.
Okay alright, thank you.
You're very welcome.
Thank you and one moment as we move onto our next question.
And our next question is going to come from the line of Derek <unk> with Jefferies. Your line is open. Please go ahead.
Hi, good morning, just to kind of follow up on the unit sales decline.
3% to 4% was attributed to weather and roughly half of the remainder is attributed to kind of lower volumes was there any portion of meaningful portion of attributed to.
Derek: Kind of credit approval rates, just associated with the LLS implementation.
Derek: Okay.
I would say Theres certainly some of that anytime you.
Restrict your underwriting whether it's in terms of down or the terms. They are certainly going to be some impact from that it's difficult to kind of tease all of those pieces out, but that's part of when Doug mentioned balancing originations.
That's a piece of that.
And we're really trying to look at the customers and the score of the customers that we're allowing those longer terms for and so Doug mentioned that we made a few adjustments to that and we're continuing to make adjustments to that and reiterating as we adjust to this new system.
I would also say it would be hard to measure because on the approval rate line you would see a negligible negligible difference if any for US. It's the deal structure, we do want that customer, but we wanted to under different terms and so whether that's how much money, we're willing to finance for a certain rating of customer whether that's how much equity position, we want them to be and when they reached.
Ate their loan.
Derek: Those are those are just different terms, it's not that they're not approved but we want them to be structured differently. It's why the affordability component is so important because if they don't have anymore. The thing that we can do to assist them as get cheaper vehicles, right and that would aid in getting more customers qualified under the new terms that we would like to have them.
Got it very helpful and then.
You guys have a timeline in mind for kind of full implementation.
Implementation across your dealerships.
Yes, so the <unk> implemented.
All of our dealerships today with the exception of our stores that we've acquired over the last couple of years and they are in their earn outs and so we don't want to tinker with them, while they're during those periods, but there'll be tucked in underneath that shortly thereafter, but.
All origination volume for for our base stores will be pretty much through the LLS Theres, one last piece, we need to address switches.
<unk> border steep transactions, where people drive from Missouri, Arkansas to get a car or vice versa. That's like 5% of the volume, but I think on a go forward basis.
Derek: Greater than 80% of our originations should come from our alloys.
Got it and then just just one more just any kind of commentary on February trends here on tax refund.
What youre seeing what the consumer would be helpful.
Derek: Yes.
Well, we mentioned I mean, the tax data sort of out there. It was off to a slow start we saw refunds initially down now that we're up higher year over year, but theres still trending about a week behind we stay really close to a third party tax partners and they are and the IRS data and our application data an.
Anecdotally from our stores.
Some of that data might be just shifted out to the right and so I'm encouraged Friday excuse me in February I said it started off we're off to a better start in the quarter than we were last quarter. So that's indicating.
Move upward and if some of that some of those sales are going to be pushed into March.
That's a great thing and we have a nice long nice long March with five weekends in there as well. So we're excited about a big month.
Great. Thank you guys. That's all from me.
Speaker Change: Got it. Thank you. Thank you. Thank you and one moment for our next question.
And our next question is a follow up question from John Murphy with Bank of America Securities. Your line is open. Please go ahead.
Hey, I just had two more.
As you guys are looking at the volume decline versus.
What were stronger Gpus is there the potential.
Will it take pricing down in Gpus are little bit lower to drive volume and how are you, making that decision and the new world order.
Thank you and again, yes.
That's certainly an option most of the.
Changes in the GPU, where really where we've been focused on efficiencies around cost.
On the repair side and being more efficient there as well as movement of our vehicles, but the pricing of that is certainly something that we'll also always consider as we move forward.
That'll be a piece of it.
Continuing to iterate on this LLS, yes, John so.
Speaker Change: Yes.
The historical gross profit average is really driven off of function of the sales price. If I just hold price constant we're going to continue to make improvements in the gross profit that we're seeing through initiatives. Some of that we can give back to win back volume and so we're trying to balance that with what our volumes and our normal run rate with this new over the last one I think.
Speaker Change: When we see that sort of normalize and get in a good spot and that's certainly an option for us as well.
Okay, and then just one other on the acquisitions.
Totally new to the story, but it sounds like youre going to ramp up significantly as youre going through this ramp in the Los and then thinking about integrating.
New store or acquired stores.
How is that process working and how big is that team and how does that actually work on the integration.
We do have a team it's not a huge team. We just started building it out this last year. So it's a smaller team. These acquisitions are also a bit unique and we've talked about this before and this is a business that these owners have built up over a significant amount of time and it's kind of there.
Maybe in their life's work and so the.
Task of working through them preparing to sell these takes them a bit of time. So some of these we may talk to for a couple of years until they finally get ready to do this but we do have several in the pipeline several that we've been talking to for a couple of years or several months.
Speaker Change: We have several in the pipeline that are getting close.
To being able to be closed off so that was in relation to our comment.
We're expecting some others before the end of this calendar year.
Okay. Thank you very much guys.
Speaker Change: Thank you John Thank you I'm showing no further questions at this time I would like to hand, the conference back over to Doug Campbell for closing remarks.
Thank you very much.
Listen I'm a.
I am really excited about.
All the initiatives that we have underway and again I'm really thankful for the effort being put forth by our team.
They keep getting backed up and fighting our way and helping our consumers might be the thing that we are myopically focused on.
It's helping our teams and our customers be successful and when you think about some of the initiatives and the cost partnership.
Alignment of our interest in just having customer success rate in the center of everything.
That's going to be a really great partnership so I'm excited about that and the lowest front I'm glad the implementation is behind us.
As we go forward I'm really excited for what it is going to do our business. We included another supplemental slide on our cash on cash returns and if you look at the third quarter projections, we had a nice improvement and thats showing the los and its influence on our on the financials of our company already so really excited about that and we're really bullish about the company's future.
Speaker Change: And these initiatives to be accretive to earnings and shareholder returns. So I. Thank you for your time today and your interest in our company.
This concludes today's conference call. Thank you for participating and you may now disconnect.
[music].
Yeah.