Good morning, everyone. Thank you for holding, and welcome to America's Car-Mart Second Quarter Fiscal 2023 Conference Call. The topic of this call will be the earnings and operating results for the company's second quarter 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 management's present view. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The company cannot guarantee the accuracy of any forecast or estimate, nor does it undertake any obligation to update forward-looking statements. For more information regarding forward-looking statements, please see Part 1 of the company's annual report on Form 10-K for the fiscal year ended April 30, 2022 and its current and quarterly reports furnished to or filed with the Securities and 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 today and thank you for your interest in America's Car-Mart. I'd like to welcome Doug Campbell, our new President to the call and Doug will have some comments in just a few minutes. So welcome, Doug. As stated in the press release, we are pleased with our sales volume productivity improvements and market share gains. The consumer demand for our offering is high and as credit continues to tighten, we expect demand to increase even more. Absent consumer affordability challenges, our volume and profit opportunities would be higher. We will be ready to support the expected increase in customers that we will see in the future. Our long-term outlook for the business and our place in the market is solid and the investments we're making will ensure that we continue to be the clear leader in our segment. We're excited about the addition of key leaders to our experienced and dedicated team who will be vital in our efforts going forward. We have great cultural fits with a mix of specific industry knowledge and experience and we're very excited about the initiatives and process and the opportunities we have to take the company to the next level. As for gross margin, external factors are clinging to our results. Supply and demand imbalances have continued and resulted in a shortage of vehicles in our price categories. Inflationary pressures with parts, labor, logistics and all indirect cost of sales are contributing to this difficult operating environment. But even in this market, we expect to be performing at a much higher level as we move forward. Due diligence with buying, shipping and repairing vehicles, we did not pass along all of our costs and our selling prices to consumers, overall, having an approximate 200 basis point…

Thanks, Jeff and good morning, everyone. It's nice to be with you today. I'll start with some color on why I chose America's Car-Mart. There are many reasons but are limited to the biggest drivers in my decision-making process. First is the opportunity regarding the buying and selling of vehicles and associated logistics. It's an area within Car-Mart that has tremendous opportunity and the potential to drive significant cost savings. I have over 25 years of experience in both the automotive retail and wholesale sectors of our industry. My most recent role in leading both the acquisition and disposal of vehicles for one of the largest fleets in the world should align nicely with the work in front of us and proven valuable for our collective futures. Second was a belief that it was the right for my wife and 2 children. Northwest Arkansas and a fantastic place to raise a family. They're looking forward to the transition in the upcoming months and becoming part of the Northwest Arkansas community. Lastly, with the culture of the company and what drives them. Over their 40-year history, they have remained disciplined in their purpose to help people which is capturing their mission, vision and values. There is strong alignment here between the company and me. I know it sounds somewhat cliche but one of the more difficult attributes of an organization is the development and the perpetuation of a strong culture. In my first couple of weeks here, I've had a chance to spend time with both leaders in the field and at headquarters which is only bolstered in support of my decision to come here. I'm very fortunate to become part of what is already a fantastic team and enhance these cultural elements. I want to now shift over to some…

Thank you, Doug and good morning, everyone. A 13% increase in the retail sales price, combined with a 30% increase in interest income, drove a 24% revenue increase over the prior year quarter. Additionally, while many of our competitors are down in volumes, we had a 7% sales volume increase. Our per-store productivity improved to 34.4 or 5% over the prior year quarter. As Jeff and Doug both mentioned, this demonstrates the demand for our product even in a tough environment and the results of some of our investments that we've been making. The gross profit dollars per unit increased slightly to $6,132 and the gross profit percentage was 32.1%, down from the sequential quarter at 34.4%. This decrease primarily resulted from increased costs for repair parts, transportation fees, fuel costs and other cost of sales expenses and declining wholesale prices and some internal efficiencies in our inventory and procurement also contributed to this margin decline. For the current quarter, net charge-offs as a percentage of receivables, despite the recent increased frequency of losses, were at 5.8%. This was in line with our prior 5-year average and below our 10-year average of 6.3% for second quarter. This compared to 4.4% in the prior year quarter. For a historical comparison, pre-pandemic, net charge-offs were also 5.8% for the quarter ended 10/31/19. The primary driver of the increased charge-offs was an increased frequency of losses but we also experienced a smaller increase in the relative severity of losses. The declining wholesale prices had an effect as well. Recovery rates decreased about 50 basis points to just under 30%. As the credit environment normalizes and credit above us tightens, now is the time that we need to work with our customers to keep them in their car and on the road. Our dealerships…

Okay. Thank you, Vickie. We are convinced of our unique place in the world and the fact that our business model is the best way to serve our customer base with the capital constraints affecting competition, market share opportunities are real and near. As we've said repeatedly over the years, ultra-low interest rates have supported some marginal competition that will now have to raise prices, shrink or even close. For over 40 years, we've been nimble and adaptable. Our current and future value proposition is solid and we've leaned into the challenges and opportunities to scale the business to allow for productivity improvements. We're blending data in digital with our bricks-and-mortar footprint which is powerful from a consumer's viewpoint. We are the market leader today and we're investing to be the market leader 5 and 10 years from now. The market we serve has been disrupted which will be a good thing for us over the near and longer-term. Our profits for the quarter were low. We're investing today and expect benefits tomorrow. We're choosing to make these investments in people, technologies and facilities because we see the opportunity as being enormous for us. We will now open it up for questions. Operator?

[Operator Instructions] And our first question comes from John Rowan from Janney.

Maybe just a couple for Vickie first. So there was a change in the allowance on a historical basis, right? So there's -- I saw a restatement. It looked like the allowance was adjusted lower. I can't see the prior period the reduction in the allowance, that didn't affect the provision expense this quarter, correct? Like meaning that there would be a reversal of provision expense because of the reduction in the prior period allowance?

That's correct.

So there was no impact, right?

Right.

Okay. Just want to make sure. What percent of your debt right now is floating versus fixed?

The fixed -- the securitization debt is fixed and our revolver is floating.

Okay. So almost 50-50?

Yes.

Okay. And then, Jeff, just kind of longer term, has always had a strategy, if you will, cheap cars along the road. Obviously, in recent years, it shifted to more expensive cars out of the necessity, what's going on with competition. In this environment, do you think you'd be better off with kind of the old strategy of smaller, less expensive cars? Do you foresee a return to that type of strategy? I'm just trying to figure out how the company's position now relative to what they were 5, 10 years ago and what's the best fit going forward?

Yes. That's a good question, John. We would love to be selling a lot more cars at lower price points and that is something we're working on with some of these reconditioning partnerships and other activities we have in place. The supply of that car has been extremely short over the last couple of years. And we think our volumes and our productivity numbers would be quite a bit higher and the availability of that product that out there in the marketplace. But we're not -- we're not giving up on that lower-priced product market. We hope it comes back at some point and just is additive to what we're already doing. A lot of our improvements in cars offered in price points has been keeping Car-Mart customers in the family longer. So prior to the pandemic and the shortage of cars, we were already focused on how do we keep somebody in the family who's been a good long-term Car-Mart customer who's paid off several cars with us, how do we not lose them to competition down the street. So that part of our model has worked as designed over the last few years. What's been a struggle is finding low cars at the lower-priced cars at the lower end to improve volumes and provide a cheaper car to entry-level consumers. So we're very much interested, focused on the lower price points and think we can dovetail that volume in with what we're already doing down the road as maybe supply gets a little more normalized.

[Operator Instructions] And our next question comes from Kyle Joseph from Jefferies.

regarding credit, obviously, we track some prime auto finance credit broadly and are seeing the same things with you. So I was pleasantly surprised to see that your credit was relatively stable, both in terms of DQs and charge-offs. Just wondering if you can give us a sense for some of the severity -- frequency and severity trends you're seeing and give us a sense for the health of your underlying consumer obviously, inflation is negatively impacting them but just how you're able to sustain good credit portion in this environment?

Yes, certainly. So the frequency of losses was the biggest contributor. The severity was a smaller piece of that. As we talked about before, our consumers, we believe are still pretty healthy. The job markets are still good. Wages are still up. Ours are still up in terms of what they're working. There is some adjustment here to this inflationary environment and a higher car payment than maybe what they've historically been used to. But as you mentioned, overall, things are pretty positive. We feel good about it. We've been working with consumers for 40 years. We're used to working through situations like this with them and that's what we'll be focused on.

And our customer base has seen some very nice wage increases over the last year and the shortage of workers in those categories that most of our customers work in. So a good wage base there and increasing wages is offsetting a lot of this inflation but it's still pretty tight from a consumer standpoint.

Got it. Very helpful. And then it was nice to see a good volume recovery, particularly in terms of units there. Is that a function of -- I know you mentioned that credit is getting a little tighter in the subprime auto finance world. Is that kind of a function of your consumer getting priced out being by higher rates and being able to shop at kind of franchise or larger dealerships? Or is that a function of the consumer just being a little bit more bargain savvy and preferring kind of the inventory you guys have?

I think it's probably a little both. I think the competition is tightening. Some of the smaller competitors are holding trouble with funding their businesses. So -- and then plus our product offering is attractive. So I think it's a combination of all those factors.

I got it. And then just one last one from me. We track Manheim and obviously, your margins were under pressure in the quarter. I think from your commentary that was more higher procurement costs rather than ongoing increases in used car prices? And just how quickly or would used car prices coming -- starting to come down year-over-year and sequentially as well kind of support that gross profit margin even if we have elevated procurement costs?

Well, we've seen a decrease in the last several months since the beginning of the summer in wholesale prices. Now we are getting closer to tax time now. So that's levelled off in the availability for the specific car, we're trying to supply. It doesn't always follow those same depreciation curve. So we're thinking that we're going to see some levelling off and some decreases in prices over the next several months and maybe see some deflation over a longer period of time. But -- anything to add to that, Doug?

Yes. Well, listen, I'll sort of -- the Manheim Index is incredibly valuable to track. I've sort of looked at the time period and locked in January 1 and sort of restated that index from January 1, 2020, prices went up, I'd call it, probably close to 40% on the cohort of vehicles, we really stay focused on sort of reaching a crescendo there in December of last year. They've come down about 17% since that point and we expect that to sort of level off throughout the balance of the user as things sort of into the spring market and there's a little bit more robustness around there. But we could see a more normalized depreciation going forward which we'll capitalize on. So I think the very first question around the pricing of the vehicles. If you sort of like think about that continuum I just mentioned, prices have come down nearly 20% but are still 20% higher than pre-pandemic levels. I think our pricing and the vehicles that we're selling is a function of what's available in the marketplace and the fact that prices are still very much elevated from pre-pandemic and we'll participate. And I think for those customers in the lower end of the credit spectrum that becomes accretive to our volume.

[Operator Instructions] And our next question comes from Vincent Caintic from Stephens.

I guess, first, I wanted to delve in on the inventories and your sense of approximately when do you -- what's the, I guess, plan for working through that and maybe some stats like the average days on inventory right now. Because I would think that -- well, maybe some of this inventory came before used car prices we're starting to climb but maybe we're now in a favorable environment. So perhaps it's a mix issue or a matter of time.

Yes. We're running about 55 or 56 days of sales in inventory. We did take $15 million out of the investment during the quarter and we're right around the corner from tax time. So we have the opportunity to be smart with our pricing in our credit during tax time and minimize any negatives that you might otherwise see from prices floating down a little bit. So we're trying to manage the inventory car by car and our mix is better than it was. We've got fewer dollars out there and think that we can make it through the next 6 or 9 months with moving through our inventory and efficient and effective way and utilized tax time to work through inventory one car at a time without any kind of major disruptions.

Okay. And then second question, just around the -- so you highlighted some of the pressures for the gross profit margin. And the second part that you were discussing about the 200 basis points related to quality challenges, the wholesaling of course, if you could go through that in more detail what's driving that? And how much of an impact is that going to be going forward? Or is the business changing that to be?

Yes. That, again, as mentioned in the press release, that related to us having a lot of cars designated for retail. But then due to some capacity issues and some cost issues, we weren't able to get those cars processed in retail conditions. So we ended up choosing the wholesale avenue lane for that product. And then we had some other challenges in the wholesale area that we are considering to be a transitional challenges that we'll work through over time. We've probably got another quarter or so of some wholesale challenges. We consider those to be temporary and something that we can work through and we'll work through over time.

Okay, great. And last one for me, just sort of used car prices, the indices has started to decline. Any sense for kind of the sensitivity of your gross profit margins or how quickly that would turn over and start to accrete to your margins?

Yes. We don't have anything specific. We're working through the issues and putting efficiencies into the processes as quickly as possible. We expect to see some quick improvements and some of the improvements are going to take just a little bit longer. So it's hard to be exactly specific but we do expect to see the bottom line effect of some of our improvements we're making relatively quickly. And with a longer-term view being that we've got significant opportunities to pick up several hundred basis points on gross margin percentages by improvements in the areas we mentioned.

[Operator Instructions] And I am showing no questions and I would like to turn the call back to Jeff Williams for closing remarks.

Okay. Once again, thank you for joining our call today. We appreciate you and your interest in America's Car-Mart. And I'd like to, as always, say thanks to all of our great associates out there who are dedicated to keeping our customers on the road and getting them peace of mind and keeping them in the Car-Mart family for life. So thank you and have a good day.

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