America's Car-Mart Q4 2023 Earnings Call Transcript

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May 24, 2023

There are 6 speakers on the call.

Operator

Morning, everyone. Thank you for holding, and welcome to America's Car Mart's 4th Quarter Fiscal 2023 Conference Call. The topic of this call will be the earnings and operating results for the company's Q4 of fiscal year 2023. 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 management's comments today may include Forward Looking Statements, which inherently involve risks and uncertainties that could cause actual results to differ materially from Managed's Present View.

Operator

These statements are made pursuant of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The company cannot guarantee the accuracy of any forecast or estimate nor does it undertake any obligation to update any forward looking statements. For more information regarding forward looking information, please see Part 1 of the company's annual report on Form 10 ks for the fiscal year ended April 30, 2022, and its current and quarterly reports furnished to or filed with Securities and Exchange Commission on Form 8 ks and 10 Q. Participating on the call this morning are Jeff Williams, the company's Chief Executive Officer Doug Campbell, President and Vicki Judy, Chief Financial Officer. And now I'd like to turn the call over to the company's Chief Executive Officer, Jeff Williams.

Speaker 1

Thank you for joining us this morning. Productivity and market share gains continue, but current profitability is not representative of where the company and the business will be in the future. Our model is flexible and we will continue to deploy capital to maximize appropriate long term returns. We expect to earn returns on equity at levels we were generating prior to the pandemic, the mid teens. We're Extremely excited about our company and the unique profitable opportunity in front of us.

Speaker 1

There's no other company sitting in a position to scale in this highly fragmented industry. Our book value is $79 per share. We have $500,000,000 in equity, which we will protect as we move forward. As discussed in our press release, competitive dynamics are rapidly moving in our favor. Our industry has had significant Disrupted challenges over the last 12 to 18 months, leading to the sudden exit of 2 large regional competitors We are collectively serving over 80,000 customers, mostly in the Southeast region of the U.

Speaker 1

S. We will see benefits in our procurement and inventory areas as well as in our sales and collection efforts from these 2 companies exiting the marketplace. We've gone from period of consumers having 1,000,000,000,000 in stimulus with 0 inflation to no stimulus with very high inflation. Again, in our industry, in particular, inflation has been especially pronounced, showing up in used car prices, parts, Shop labor rates, transport services, all being at record highs. Interest rates for auto loans have escalated sharply.

Speaker 1

According to Cox Automotive, credit availability was tighter year over year by 8.5% across all loan and lender types in April. Consumers have been stretched and affordability has been tight, but as Vicki will talk about more in a minute, our net charge off levels are just slightly above pre We have not just persevered, we have significantly improved our position. Fiscal year 'twenty three represents steps, huge steps in the right direction. In the face of all these challenges, we've added great talent to our team and pushed on with difficult, complex, time consuming resource heavy investments and initiatives. We are clearly seeing the signs of the expected benefits of our efforts.

Speaker 1

Our model is the best way to serve our customer base Who needs us and the service we provide, which is evident by the increasing demand for our offering. Just a quick update on some initiatives. As to people, we've now completed the key additions to our leadership team. The incredible talent that we've attracted to our company is as serving as an accelerant in driving operational improvements through change management and completing and leveraging our initiatives that we have in process. Our ERP initiative is progressing as expected and will be completed by the end of this calendar year.

Speaker 1

It's hard to quantify the enormous benefits of us moving away from our legacy system, but the move is essential for us to become a data driven company, Better supporting operations as we serve customers. This change is foundational to efficiency improvements, Elimination of manual tasks giving us operating flexibility, allowing for future profitable growth. Also, As we've discussed, the CRM module, parts of which are being utilized currently, sits within the ERP and will allow us to significantly Increase and improve our marketing, selling and supporting customers. And as a reminder, the CRM provides The underpinning to our loan origination system and attracting a higher number of better credit score customers, which Doug will expand on in a minute. Also as we've communicated, we will look to acquisitions of well operated dealerships as a powerful use of capital.

Speaker 1

Our acquisition team has their ear to the ground and we expect further disruptions in the competitive landscape to provide additional opportunities as we move forward. We're actively talking to a number of parties regarding some of those opportunities. As mentioned in the press release, We have completed a large percentage of the heavy lifting related to our extensive long term investments and we're now set to push efficiencies and leverage our cost structure as we bring credit losses down and we bring gross margin percentages up. I'll now turn it over to Doug. Doug?

Speaker 2

Thanks, Jeff, and good morning, everyone. A big thank you to our field and corporate teams for doing a nice job on executing our strategy to be ready for the tax season. We had a multi pronged approach, which included ensuring our stores were stocked, that we worked through high cost and aged inventory and reduce overall inventory levels by 25%, mainly due to finding gains in efficiency while not missing our sales target. So not being easy task while also navigating A tricky wholesale pricing environment. Given the rate of wholesale price decline that we saw in the last year, which was over 20% and the highest on record, One might argue that it was too much decline and too fast a time period, especially when you consider that wholesale and retail inventory levels for our industry We're at historical lows.

Speaker 2

It had all the ingredients to drive abnormal price strength above and beyond what we might experience on a seasonal basis. Despite the average annual tax refund being down 7%, the spring selling season was robust and there were several areas that we can look back on and be proud of. For the quarter, we sold 17,655 units, a record for the best sales volume for any quarter in the company's history, which was up 7.5% over the prior year's quarter. February in particular was notable, being the best on record And having the single best sales day of 6 20 units. When looking at sales on a same store sales basis, they were up 5.6%.

Speaker 2

This growth that we're seeing is really showcasing the impact of some of our more recent acquisitions and their future benefits to the organization. For the fiscal year, sales were up 4.9%. We were able to achieve our targeted reduction in inventory by 25% By finding efficiency gains in our ecosystem, like cutting the time it takes to in fleet vehicles in half, we turned retail and wholesale inventory faster 7.4 turns up from 6.7 turns versus last year's Q4, which got our inventory aging at a manageable and acceptable level. The team also navigated the pricing environment well. Wholesale pricing typically falls early in the year and starts to increase in late February Then peaking in April, which we call the spring bounce.

Speaker 2

During that time period, prices normally would flow back to their January 1st values And even climb a point or 2 before cooling off and then declining at a more normal rate for the balance of the year. The ability to anticipate these fluctuations and timing it Around the pricing, both on your purchases and disposals is critical when operating large fleets. Unlike a normal pricing season, increases were seen very early as early as the 2nd week of the year, which is much earlier than normal. Prices then peaked at 6% or 7% above their January 1st values in early April before beginning to cool. However, when looking at small and midsize car segments, those saw increases of more than 10% as dealers competed for vehicles to meet the affordability challenges that already exists in our industry.

Speaker 2

Our ability to plan and effectively navigate this environment is critical. During this period, our purchase Price of vehicles deviated less than 3% by doing a majority of our purchasing earlier in the season and we shifted make and model mix around to avoid having materially higher sales prices that could slow our sales pace. In fact, if you looked at sales prices sequentially between the 3rd Q4, there was only a $42 variance in price despite working through some of our high cost inventory. As Jeff mentioned in the press release, we are doing a better job being more strategic and efficient with our investment here in inventory. A large part of the growth that we saw is related to our ability to drive traffic both online and in store with our new LOS.

Speaker 2

The ease at which customers can apply, get approved and schedule for appointments drove incremental traffic into our stores and contributed to the strong growth that we witnessed during the quarter. The online application volume was just up over 22% relative to the same period last year, but we know that customers have also Where they start the buying process. However, if I look at both online and in store traffic, total application volume was still up over 10% versus the prior year's quarter, Showing this effort with the LOS is truly accretive to our business. Additionally, we're seeing incremental growth of higher scoring customers applying for credit. Jeff has alluded to this several times in the past that with credit tightening, we'll start seeing this customer profile trickle in at a greater rate and we're prioritizing these applications given the rising cost Capital and their inherent ability to drive better performance in our receivables portfolio.

Speaker 2

Lastly, as a quick update on the LOS, I spoke earlier on the application volumes and on the last call I mentioned how the application portal was live throughout all of our stores. We're now going live by digitizing our sales process. The first store goes live this week. So what does that even mean? It means less paperwork for the customer to sign.

Speaker 2

In fact, that will be reduced by 75%, making the sales process faster. It allows for more capacity in terms of what we can process without having to change staffing levels. Subsequent standing and processing of documents will also be reduced and makes it easier for our office staff after the sale. It also provides more control at a centralized level from an underwriting perspective, but most importantly, all of the data that is now being analyzed to drive better decision making, which will add a level of agility that we didn't have before. After rolling out our pilot store, we'll be activating other stores state by state over the coming months.

Speaker 2

I'll flip over to gross margins. For the quarter, we finished at 33.4%, down about 2% versus the prior year. Wholesale loss had been one of the contributing factors, but much less so now. We've had additional improvement here again in the quarter by reducing losses by 27% versus the prior quarter, And we continue to make strides here and have an opportunity to really outperform pre COVID norms. Another and I think our biggest opportunity as it relates to gross margins would be what we spend on the repair of vehicles.

Speaker 2

There's basically 2 categories here. The first is related to making inventory frontline ready. Our reconditioning pilot that we've mentioned in the past is driving savings here. And on the prior call, we stated that our initial findings That there would be a benefit between $300 500 on a per unit basis. For what we processed through the last quarter, those savings are north of $500 per unit.

Speaker 2

The The issue we're having here is getting enough inventory through this channel, especially when considering what's happened with pricing during the last quarter, but we'll continue to persevere here. 2nd are the repairs to vehicles in our receivables portfolio, which would be associated with service contract obligations or customer repairs made to keep our customers on the road. We've seen a sharp increase on what we spent here in a year over year basis. While a normalized environment would yield a better outcome, there are steps we've been taking to drive better performance. I'll give you an example.

Speaker 2

During the pandemic, we used the vehicle's age and mileage as a lever within the business to combat vehicle cost. While it served its purpose upfront, some of these vehicles had higher than normal repair costs after the sale. We had anticipated this and as a company modified service contract pricing to capture What the predictive exposure would be, but the real opportunity is to get this back in line, while keeping the benefit of the higher revenue on the service contract and the benefits that it provides. An obvious solution would just be to pivot back to normal in terms of what normal is on the aging miles of the vehicle that we purchase We'll accelerate this by targeting newer cars with lower miles than your historical average. And that's a solution we've been working on for 6 months now.

Speaker 2

Over that time period, we've augmented purchasing guidelines to procure a vehicle that's 2 years newer with 10000 to 12000 less miles for the same cost. These are vehicles that we've been selling over the last quarter and a half. These are also there are also tactical solutions that we're doing at a field level to over manage the active fleet, which will aid in containing some of these costs and pay dividends as it relates to service contract failure rates and the instance we would need to intervene with a customer on a repair We look forward to updating you in the quarters ahead and are excited to share our efforts toward the progress we're seeing here. I'll now turn it over to Vicki who will cover our financial results. Vicki?

Speaker 3

Thank you, Doug. Good morning, everyone. For the current quarter, our net charge offs as a Percentage of average finance receivables were 6.3% compared to 5.1% for the 4th quarter of fiscal year 2022 and 6.1 percent for the pre pandemic quarter ended fourthirtynineteen. These are just above our prior 5 year average at 5.7% and below our 10 year average of 6.8% for 4th 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.

Speaker 3

Recovery values were held flat in the last quarter at about 28%. As of April 30, 20 23, the allowance for loan losses was 23.91 percent of finance receivables net of deferred revenue. We did increase the allowance percentage in the 4th quarter, up from 23.65 percent to reflect the effect of the higher net charge offs on Our overall portfolio performance as well as the uncertain macroeconomic environment and continued stress of the inflation on our consumers. This change resulted in a $3,300,000 or $2,500,000 after tax charge to the provision in the 4th quarter. We will continue to be focused on improving the loan structure with better down payments and upfront equity.

Speaker 3

The rollout of our LOS will assist us Achieving these improvements. Our internal applicant scores were slightly above the prior year and we expect to be able to gain market share and attract higher credit quality consumers as other lenders above us continue to tighten credit. An early indicator of this, In the Q4, we saw FICO scores for customers originating during the Q4, reflecting the largest percentage improvement that we've seen in several years and higher than any other quarter. This will allow us to continue to improve the percentage of the portfolio held by our highest credit quality customers. Our accounts 30 plus past due was at 3.6%, flat sequentially and compared to 3% in the prior year quarter.

Speaker 3

Total collections were up 7% to $178,000,000 and total collections per active customer per month were $5.86 flat with the prior year quarter. This was considered a positive given the continuing inflationary environment and income tax refunds down overall by 7%. The average originating contract term for the quarter was 43.5 months compared to 42.1 for the prior year quarter and up slightly from 42.5 months sequentially. We added 1.4 months to the originating contract term compared to the prior year's Q4 to accommodate the $6.14 or 3.5% increase in the average selling prices. And as Doug mentioned, the average retail selling price remained relatively flat with only a $42 increase sequentially from the 3rd to the 4th quarters.

Speaker 3

Our weighted average contract Term for the entire portfolio including modifications was 46.3 months compared to 42.9 for the prior year quarter and the weighted average age of the portfolio improved to approximately 10 months. Our SG and A spend have significantly impacted our SG and A spend. We're actively focused on identifying efficiencies in our processes and where appropriate making reductions in spend to marketing, staffing and variable costs. Our investments in people, Technology platforms and strategic initiatives will eventually lead to better efficiencies in the business. The majority of our SG and A investments have been made and increases going forward will be much lower than the percentage increases we've had the last couple of years and more in line with or below general inflation.

Speaker 3

Our customer count increased by 7 point 6% over the prior year to over 102,000 customers and our investments are being made to better serve this growing customer base while improving these efficiencies. At quarter end, our revolving debt was We had $9,800,000 in cash and approximately $121,000,000 in additional availability under our revolving credit facilities based on our borrowing base of receivables and inventory. Our total securitized non recourse notes payable was $498,500,000 with $58,000,000 in restricted cash related to those notes. Our total debt, net of cash to finance receivables ratio is 41.5, down from 42.2% the last quarter end. Thank you, and I'll let Jeff close this out.

Speaker 1

Okay. Thank you, Vicki. The consumer demand for our offering is high and increasing, and we've been making investments to increase our operating moat. As Vicki mentioned, we're now serving over 102,000 customers. About a half of those are repeat customers with a high lifetime value.

Speaker 1

Our growth in recent years has primarily come from the expansion of the customer base in existing markets, markets that we know well. We've also completed a few highly successful acquisitions and we'll continue to prioritize our acquisition strategy, especially considering the current competitive marketplace disruptions, which we anticipate more of. While we constantly scrutinize capital deployment, the significant increase in the cost of capital that we've seen recently requires us to be even more diligent and we will be. Our balance sheet is very healthy and we will keep it that way. We will continue to make prudent investments in the business And the timing of these investments will be made in an effort to properly align expenses with sales, something we've done successfully For a long period of time, CapEx will be lower going forward.

Speaker 1

And to reiterate, most of our projects are completed or near completion. As to vehicle affordability, we do expect vehicle cost to flatten and normalize even in a tight supply market as we improve our processes. Sales prices and loan terms will also continue to flatten with consumer affordability Returning to pre COVID levels over time as the job market stays strong and wages continue to increase and other inflationary pressures ease. Improvements in affordability will result in higher customer success rates, our ultimate measure. We are confident in our ability around procurement and inventory management, and we're very excited about the potential improvements in this area of our business.

Speaker 1

And as Vicki mentioned, SG and A will level off as we move forward. We've had to make significant investments that can now be leveraged. The ERP will allow for huge efficiencies across all administrative and data functions, unleashing powerful benefits. As always, We'd like to thank all of our associates for their dedication to our purpose and for all they do to keep our customers on the road. Thank you.

Speaker 1

And we will now turn it over to the operator for questions. Operator?

Operator

Thank And our first question comes from the line of John Murphy with Bank of America. Your line is open. Please go ahead.

Speaker 4

Hi, this is Billy Healy on for John Murphy. Thanks for taking our questions. Can I just ask you about the availability of credit For consumers and in total and like has there been any pullback in aggregate and have others come in and backfilled with that availability?

Speaker 1

Yes. I think we're certainly seeing credit restrictions in the Cox report For April indicated that credit is tighter by about 8.5% compared to this time last year. We're certainly seeing that in our markets. And as Vicki alluded to, the credit scores of customers we're seeing, especially in the Q4, have come up Significantly, which would be another indication that credit is certainly tightening above us in our markets.

Speaker 4

Okay, great. Thanks. And if I could follow-up, just on the state of your average consumer, what are you seeing there? Are You're seeing any improvement at all or are your consumers still struggling?

Speaker 1

Our customers historically have always struggled in good times and in bad. It's Something that we deal with constantly. It is a little tighter now with inflation, but the shock of inflation, We certainly worked through that. There was initial period back in summer of last year where it was a real sudden shock, But I think consumers have adjusted. So but there is some additional strain.

Speaker 1

Inflation is real, but our customers have always made ends meet, especially with our help keeping them on the road. It is a lot better than it was back in the summer of last year.

Speaker 2

Additionally, I'd add, this is Doug, That what we saw in the Q4 with FICO scores, we mentioned about the customer dynamic is changing. If we looked at it from a FICO score basis, We've had the highest influx of a better credit customer for 4th quarters that if you go back 5 or 6 years, Even if you compare that to any quarter on record over the last 5 or 6 years, that credit profile is better. So that's also really encouraging to see, especially when you have the sort of volume that we did last quarter.

Speaker 4

Great. That's really helpful. Thank you. One more if I may. Just on I know you talked about your efforts towards like reconditioning and getting hopefully flattening out those vehicle costs over time.

Speaker 4

Can you just talk to like In total, the availability of supply of what you'd call reasonably priced vehicles, has that improved at all?

Speaker 2

Repeat the last part of the question of what price of vehicles are reasonably priced?

Speaker 4

Reasonably priced, yes.

Speaker 2

Yes. So, it's tight. We're all retailers out there fighting for The same piece of inventory as rates have continued to go up. We're all out there targeting a piece of inventory. There's a lot of people that are now encroaching in our space For vehicles that we would normally target and so we're having to get more creative.

Speaker 2

What's been interesting is over the last quarter, we had 2 large competitors that exit the marketplace who also Participated in that space. So it has sort of been like a release valve on the procurement side. We have seen the ease in purchasing Because we have less competition, right? So someone who if you combine those two companies just slightly smaller than us, like that has been sort of a godsend, especially out where The territories that they occupied in the Southeast part of the United States, where it's where a lot of our procurement activity goes on. So, there's that.

Speaker 2

And then additionally, They served a different type of customer. With this higher price asset, it is making it easier to upload those cars as well and it gives us an opportunity for growth there as well.

Speaker 4

Okay, great. Thank you. I'll get back.

Speaker 2

You bet.

Operator

Thank you. And one moment. Our next question comes from the line of Derek Silver with Jefferies. Your line is open. Please go ahead.

Speaker 5

Hi, good morning. Could you talk about the impact of lighter tax refunds on this quarter's performance and if there are anticipated to be Any lingering impacts from this dynamic moving forward? It seems like the trickle down of FICO scores may have overshadowed this dynamic in the performance.

Speaker 1

Well, the refunds were down about 7% for the year. And with the inflationary pressures that consumers are feeling, our tax refund payments We're less than they had been pre pandemic. So there's just indications that consumers are a little tighter on cash, a little more stretched They've been in the past, but we fully anticipated that. Not surprised at all. But Collections during tax time as a percent were lower than pre pandemic and that's just based on affordability and other inflationary pressures on the pocketbooks of consumers, but we're working through that.

Speaker 1

And again, charge offs are in good shape And we're optimistic looking forward.

Speaker 5

Got it. Thank you. That's all for me.

Speaker 3

Yes. I think the flat amount collected per customer There's some indication of that as well, so.

Operator

Thank you. And one moment. Our next question comes from the line of Tom Luedtke with CIA, your line is open. Please go ahead.

Speaker 5

Hi, thank you. It's Citadel Investment Advisory. I wanted to ask if you could give us kind of a Profile of the companies that have exited the market, is it death by a 1,000 lashes with Everything seemingly going against the industry with interest rates up, car prices up, labor shortages, price of everything increasing. So could not to pick on anyone specifically, but what has caused them to exit the market and how do you compare and contrast that to what you're doing?

Speaker 1

Yes. We don't know specifically what caused the exits, but the things you mentioned Certainly played into it. Interest rates are much higher than they were a year ago. The cost of operating the business, especially the cost of the car is much higher than it's been historically. And so we don't know specifically the issues with these 2 competitors.

Speaker 1

But for us, we focus On cash flows, we focus on operating efficiently at the dealership level. We focus on a very clean and strong balance sheet. We're not over levered, A lot of equity on the balance sheet, which is extremely important in times like these. So and then we've got Over half of our business is to repeat customers and most of that is in markets that we've been in for a very long period of time. So we've got some real advantages in attracting and retaining a good solid customer base that we know well And have known well for a long time.

Speaker 1

We're improving our product offering and doing a lot of things corporately To invest in the support of consumers, and I'm not sure if other companies have the ability To go out and invest in the face of some of these challenges like we have to not only persevere, as I said earlier, but To actually be in a much stronger position by utilizing that balance sheet, investing in areas that are going to make a difference in customer success.

Speaker 5

Okay. Thank you. That's helpful. The one thing I'd like to follow-up with is that the people that have exited the marketplace, How long have they been in business? I mean, are these people that have been in the business 5, 10 years or longer, 20, 30 years?

Speaker 1

Yes. Longer than 15 years.

Speaker 5

Got it. Thank you. Yes.

Operator

Thank you. And I'm showing no further questions. And I'd like to turn the conference back over to Jeff Williams for any further remarks.

Speaker 1

Okay. Well, again, thank you for joining us and thanks to all of our associates making a difference every day in the lives of other associates and our customers. Thank you and have a great day.

Operator

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

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