America's Car-Mart, Inc.

Thank you for standing by and welcome to America's Car Mart second quarter 2024 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentations, there will be a question and answer session. To ask a question at that time, please press star 11 on your telephone. As a reminder, today's call is being recorded. I will now turn the call over to your host, Ms. Vicki Judy, America's Car Mart CFO. Please begin.

Thank you and welcome to America's Car Mart's second quarter 2024 earnings call. Joining me today is Doug Campbell, who took over as our company's CEO on October 1st, 2023. We've issued our news release earlier this morning and it is available on our website. We've updated our reporting format with a simplified look, providing an efficient and easy comparison of important metrics against the prior corresponding quarter and commentary about our results. In addition, we will post the transcript of our prepared remarks following this call. And we are also going to be posting some slides to our website, some supplementary materials. We are having some technical difficulties this morning, but those should be up shortly. And those will help further illustrate many of the talking points that we're going to cover in our call today. The Q&A session will be available through the webcast after the call. We believe that this process will help enhance how we share our quarterly results with you, and we welcome your feedback. During today's call, certain statements we make may be considered forward-looking and inherently involve risk 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 estimate, nor does it undertake any obligation to update such forward-looking statements. For more information, including important cautionary notes, please see Part 1 of the company's annual report on Form 10-K for the fiscal year ended April 30, 2023, and our current and quarterly reports furnished to or filed with the Securities and Exchange Commission on Forms 8K and 10Q. I will now turn it over to Doug for his introductory comments about our second quarter.

Good morning, and thank you for joining us and for your interest in our company. First, I'd like to thank our associates for their relentless focus on keeping our customers on the road. I also appreciate all the many messages I've received on my appointment as CEO. It means a lot, so thanks for that. I want to take a moment to recognize the passing of Hank Henderson, one of our board members and CEO prior to Jeff Williams. His contributions here at the company and in the community to his family will leave an indelible mark. He was a valued board member and a long-time shareholder. His pointed advice to me about the opportunity to be a CEO has a different meaning today. So thank you, Hank. During the quarter, we identified someone with a similar profile that has a long-term view of the business. As such, we recently added Jonathan Bubba, from Nantahala Capital Management to our board. He brings many years of experience within specialty finance, including subprime installment lending, pawn lending, and lease-to-own retail. He is a shareholder as well, and we're excited to have him join our board. Now, I'd like to address a quarter. If I'm on the other end of this call, I'd have a lot of questions about the results, and particularly credit losses. I'd ask you to bring into context that GAAP accounting requires us to report our results as a retailer with an accounts receivable balance of almost $1.5 billion originated over the last four years. As the business grows, the impact of reserves and credit adjustments on our portfolio originated over a four-year period becomes even larger in relation to the quarterly results. The way we measure our business is the cash we collect over time relative to the money that we put out on the street. And if you look over time, we've never had a pool of loans in which we earn cumulative cash returns less than 50% in excess of the cash outlay over the life of the contracts. What has changed is that it takes longer to recognize it. But 10 years ago, we put $1 out on the street and get approximately $1.60 back over time. And that's still the case. Let me also tell you why I came to Cardmark. Over the last five or six fiscal years, the business has generated almost $600 million in free cash flow. The companies repurchased $156 million in shares, grown the net AR balance by $739 million, funded various capital expenditures of almost $78 million, while funding increased inventory of $79 million in a growing business. They've been able to do this because of the underlying pools of receivables that the company has originated. have consistently produced cash flows in excess of the cost to operate the business over time. This remains the case. Additionally, this segment of automotive is large and a growing part of our industry. The ability to really help consumers who have little to no access to credit from an industry leader with a great track record and an abundance of opportunity made it attractive. Especially when you consider the opportunity to feather in my skill set and industry best practices with CarMart's unique culture, it has the power to take the business to the next level. And that's what I'm focused on. Today we reported revenue increase of 2.8%. That was primarily driven from a 23% increase in interest income. Sales volumes were down 4.6%, but sales revenue only saw a decline of 0.4%. The muted sales revenue was a product of a 5.6% increase in the quarterly average selling price moving from $18,025 to $19,035 year-over-year. Approximately 40% of this increase was related to the vehicle's selling price, but 60% was related to the increased revenue for ancillary products. Sequentially, the quarterly average selling price was relatively flat. As far as sales volumes, we finished the quarter with 15,162 units versus 15,885 units sold last year. August and September had respectable volumes and collectively posted a gain in sales year over year, but October sales results were down. Several items contributed to the sales decline witnessed in October, and I'll talk about that now here. Web traffic was consistent and still posted gains year over year, and online credit applications for the quarter were also positive by 19%, yet there was a decrease in showroom traffic. Additionally, launching several states onto our new loan origination system, or LOS, was a contributing factor I'll speak to more in a minute. Overall, we're trying to balance sales volume with our new system, onboarding new stores, and introducing new underwriting guidelines. We spent the better part of last year rolling out the consumer application portal for our LOS, which allows the consumer to apply faster, have a soft credit pool during the application process, and get a response via text as to the status of their application, as well as centralized appointment settings. We're now in the second phase of our LOS rollout, which is related to underwriting and how sales are being originated. During the quarter, we onboarded three additional states, bringing the total to five states, which accounts for about 45% of our revenue at quarter end. We started out the fiscal year rolling out the dealer-facing portion of this tool. As a reference, our legacy system had limited ability to influence outcomes, but served as a stable platform to originate deals and manage associated costs. Our original intent was to roll the system out with similar underwriting rules as our legacy system, Alice, allowing users to learn the system over time, but giving us enhanced data and visibility. However, with a backdrop of increasing credit losses, we made the strategic decision to implement new underwriting rules, which primarily sought to decrease terms and increase down payments. The initial results were very positive. When looking at originating terms, we finished at 44.1 months for the quarter. While this is up year over year, it's down sequentially by 0.6 months. It's the largest decrease we've seen since July 2019. The originating terms during the quarter for our legacy system were approximately 44 months and 42 months on the new LOS. Originating terms were both down in both systems and both trended downward throughout the quarter. Average down payments for the quarter were 4.9% and relatively flat when viewed sequentially. but down 30 basis points year-over-year. Yet when comparing the two originating systems, we collected nearly a point more in down payment on the new LOS, generating 5.5% down and 4.6% in ALIS. This demonstrates how effective the system is, and our teams are pushing for improved deal structures, despite the seasonality we normally see with cash down payment percentages. The benefits of LOS are no longer theoretical. It's deployed in about half our stores already, and we couldn't think of a more opportune time to begin testing its capabilities. These combined results show that we can more quickly and precisely adjust parameters. As with any new system, there are growing pains. We're projecting to have the LOS completely rolled out in the third quarter prior to tax season. Ultimately, we're striving to achieve higher volumes with better deal structures to help our customers be more successful, and we're confident the investment will have long-term positive impacts. While adding a level of sophistication to our underwriting is critical, a large part of our result is a function of our servicing efforts after the sale, which we must continue to execute at a high level. The gross margin initiatives we are focused on continue to bear fruit and improve materially year over year. Sequentially, there was a small decrease, but this was a function of the sales miss I discussed earlier. We also continue to improve the age and mileage of vehicles we're purchasing compared to the prior year. During the quarter, we were able to bring down our purchase cost average of vehicles, despite the UAW strike and any noise it created. If you reference slide four in the supplemental material on the website, I've included two charts. In the first chart, I put our purchase cost average up against Cox's MMR index, which tracks price movement throughout the year on a set basket of goods. We're improving our timing here, which ultimately will reduce how we own that vehicle relative to a given book value at the time of contract origination. It's evident we're moving with the market better, despite us doing this with lead times of three to four weeks. The second chart shows during the same period that we've improved the quality of the assets by purchasing newer and lower mileage vehicles. These are material changes, which lower repair costs during initial reconditioning and while under a service contract, contributing to better gross margins. When combined with the inventory procurement and remarketing management processes implemented last year, We're delivering operational improvements for our customers and the company. We've made great strides in both our procurement and remarking capabilities, and a key driver going forward will be our ability to resell more of these vehicles that are repossessed. The opportunity today is considerable and continues to grow as newer vehicles cycle through our portfolio. We've engaged a national provider to perform reconditioning and improve vehicle quality, which will in turn help drive the overall average cost down improve gross margin, reduce credit loss, and enhance cash flow. We will launch this during the third quarter. This is also critically important to addressing the affordability headwinds for our consumers. I want to touch on net charge-offs and overall credit losses. Although the macro environment has seen some cooling of inflation over the quarter, the lingering financial and psychological effects of the worst bout of inflation in four decades continues to impact our consumers. Goods and services are still far pricier than they are just three years ago, with the economic inflationary pressures on our customers now more prevalent in all areas of their lives. Things like higher energy costs, food, housing, and auto insurance, just to name a few. This is the largest contributing factor that drove an increase to the frequency of losses during the quarter of 24%. The unit losses on repossessions peaked in September and came down slightly in October, Our 30-day-plus delinquencies also improved during that same timeframe, which are both positive signs, but we remain cautiously optimistic about this movement. I will now turn things over to Vicki on more details on the financials.