Good day, and thank you for standing by. Welcome to the America's Car-Mart's First Quarter Fiscal 2025 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] 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 of America's Car-Mart. Please go ahead.

Good morning, and welcome to America's Car-Mart's first quarter fiscal year 2025 earnings call for the period ending July 31, 2024. Joining me today is Doug Campbell, our company's President and CEO. We've issued our earnings release earlier this morning and it is available on our website along with a slide detailing our cash-on-cash returns. We will post the 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 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, 2024, and our current and quarterly reports furnished to or filed with the Securities and Exchange Commission on Forms 8-K and 10-Q. Doug will start us off with his thoughts on the business and strategies for this fiscal year.

Thank you, Vickie. And thank you everyone for your interest in America's Car-Mart, and for joining us to hear more about our first quarter results. As I mentioned in the earnings release, I'm pleased about the improvement in sales volume versus the prior year when viewed sequentially. If you recall, we were down almost 20% in the third quarter. We then finished down 13.6% in the fourth quarter and have closed the gap to be just under 10% now. We're pleased that website traffic increased both year-over-year and sequentially, indicating strong consumer demand. However, application volumes were slightly softer, contributing to the decline in sales. We believe that part of this decline is the need for more affordable vehicles. We've been working hard to bring down the average retail price during the quarter. When viewed sequentially, we had a reduction of approximately $100 in the average retail price when you exclude ancillary products. Vehicle procurement prices are a good leading indicator for our average retail prices, and with the progress we've made during the quarter, we expect these benefits to both improve and continue. Gross margin continues to be a positive story, up 30 basis points for the quarter. We remain very focused on gross margin improvement through pricing discipline, reduced transportation costs and lower vehicle repair costs. The biggest challenge for our industry, and for us, is ensuring we match inventory levels and pricing to the demand and the type of consumer we're seeing in the marketplace. We've taken several actions in the value chain to lower vehicle acquisition costs, which means we can pass those savings on to our consumers. Our partnership with Cox Automotive is a key component in our plan to address affordability for consumers and improve gross profit margins for the company. Recall that this…

Thanks, Doug, and good morning, everyone. In my commentary, the comparison that I will cover will be the first quarter of fiscal 2025 versus the first quarter of fiscal 2024, unless otherwise noted. Total revenues decreased $19 million, or 5.2%, largely due to a decline in retail units sold. Interest income increased by 7.2%, primarily due to the increase in the consumer contract interest rate to 18.25%, which was increased from 18% in December of 2023. The weighted average interest rate was 17.4% at July 31, 2024, compared to 17% [at July 31, 2023] (ph). As Doug pointed out earlier, our priority in both sourcing and sales is on vehicle affordability, as our customers are persistently squeezed by several economic factors affecting their paychecks. Average units sold per dealership per month were down from 34.2 to 30.9, or 9.6%. The average retail sales price was up 2.4%, primarily attributable to increases in ancillary products. We continue to balance the appropriate underwriting risk with sales volumes and have limited originations at a select number of dealerships to focus on collections and originating only the highest credit scoring applicants. This has contributed to lower productivity on average. Earlier, Doug explained that the back book of originations from fiscal '21 through fiscal '23 accounts for 33% of the portfolio, and that 40% of the portfolio originated through our new underwriting system. We're pleased with the benefits we're seeing on downpayments and deal structures. Downpayments for the quarter were up 20 basis points to 5.2%. While this is not an enormous increase overall, the distribution of the downpayment by customer score is improved and is expected to be significant in terms of customer success. This also builds on last quarter's sequential increase of 40 basis points on downpayments. Our average originating term was 44.3…

Thanks, Vickie. We know that the economy is challenging for consumers, and we're undertaking many operational initiatives to improve certain aspects of our business. I'm proud of our associate value proposition and the dedication of our teams. Before we start the open Q&A, I'd like to reiterate our focus for the fiscal year: First, we want to continue to push for operational excellence on sales and collections as we leverage the technology recently installed and updated. This includes constantly looking at the return on invested capital at our stores and ensuring that we are focused on getting the best returns possible for our shareholders. Two, to improve the affordability for our consumers by reducing the average retail price during the fiscal year. There are several components to this plan, but we're well under way and will continue to see benefits here. Three, the continued optimization of our loan origination system. We're seeing its benefits, and I believe we're just scratching the surface. Our credit and underwriting teams are working to fully exploit the benefits of this system. Four, to capitalize on our partnership with Cox Automotive. I believe this to be a long-term partnership, and we are just getting out of the gates. I'm excited about the benefits for our shareholders and collective companies here. Five, is to implement our strategic plan and focus on acquisitions. We're actively in the market looking at opportunities and believe this is still the best return for our shareholders. I'd be remiss if I didn't mention just how important people are to our success, both existing talent and new talent that will round out our leadership team. Now, operator, please provide instructions to ask questions.

[Operator Instructions]

Operator, this is Vickie. We've gotten a couple of questions in from buy-side investors that I'd like to take.

Please proceed.

The first one says, "Can you explain the headwind in SG&A that's coming from your acquisitions?" Doug, I'll take this one. First of all, as we acquire these, day one, we acquire their SG&A, of course, with all of their dealership costs, their associates, but we're not acquiring their portfolio of customers. So, we're starting with the cost and no portfolio to go along with it. This last one we did with TAC was a little more impactful due to the size and we have visibility into leverage once this book is built out. The second question is regarding the back book. It says, "You've mentioned the back book and LOS origination several times. Can you explain how you think about the portfolio and how it sits today?" Doug, I'll let you take that one.

Okay. Good morning, everybody. I think if I had to break it up, I think if you go back to the second quarter of last year, we noted the back book. I don't think we used the words back book, but we spoke in detail about the losses that we were seeing from some of the pools originated in fiscal years '21, '22 and '23, and the effects on those and the severity that they had on the portfolio, and then the overall current environment, which was driving a frequency of loss at that time. And so, we still see that, but to a lesser effect. Back then, those loans represented greater than 50% of the portfolio. Today, as we sit, they're less than 33% of the portfolio. And so, as time goes on, they represent a smaller and smaller portion of the book. And so, that's a really positive story. And at the time, in the second quarter of last year, our LOS only accounted for about 10% of the portfolio. Today, that's about 40% of the portfolio. So, I'd like to sort of like look at those two chunks of businesses, call it the 73% of the book. The remaining portion of the book is really fiscal year '24 originations. And so, those have a really interesting story, because they're a combination of originations out of our legacy system and a combination of LOS originations towards the end of the year. What was interesting about fiscal year '24 is we had started tightening our underwriting standards at that time on our legacy system. And so, the original projections for those, if you go back four quarters ago, they had cash-on-cash returns projected at 59%, the subsequent quarter produced projections at 61.3%, then 62.9%, and the most recent projection is now at 64.4%. So, we continue to see favorability in that remainder of the 27% of the portfolio. So, I'd like to sort of think about fiscal year '24 and fiscal year '25 as sort of being really positive and a return to the norm. And the fiscal year '21 through '23, which accounts for just a third, as sort of the back book and a much lesser extent. And as we move forward here into the next quarter, we project those will account for an even smaller portion and LOS will account for greater than half of the portfolio. And we see those showing up both in the cash-on-cash returns and the favorability that we get in the provision adjustment. Now, I guess, I'll turn it back over to the operator to see if there's any more live questions.

Thank you. We do have a question from John Hecht with Jefferies. Your line is open.

Hey, guys. Thanks very much. Good to meet you, Doug, and Vickie, good to chat. So, appreciate you guys taking my questions and all the details on the call. I have a couple of questions. Number one is, you guys cited affordability as a key factor in the business now. And I think we've heard that elsewhere in the market too. And you guys have implemented a lot of strategies to reduce the cost, the cost of car acquisition and refurbishment and so forth. I'm wondering how much can that help affordability, just in things you can execute. And then, the second question that would be related to that is, what do you guys expect with used car prices and how might that impact the affordability issue?

Yeah, great question. Good to be with you, John. So, if I think about the affordability, we sort of started sketching out our fiscal year '25 business plan and affordability being a key component sort of last year December, January, and the actions that we would take to sort of accelerate that. One of those things is the Cox partnership on how we could repurchase some of the vehicles that are entering the marketplace, have Cox do those repairs and then produce units on our front lines that are going to help drive down the overall average in price. The affordability, why we sort of believe in that thesis that that's a bigger component and the biggest driver is that also we see that in the applicant side of the business. So, when we look at credit applicants, we've seen some softness in both the applicant income. And so, we want to address that we're trying to target getting where we have our loan origination system set and the PTI thresholds match to vehicles that would fit the consumers that are applying to us. And it's a moving target. And we do believe that they'll continue to be softest in the back half of the year in terms of pricing. August is sort of a little bit of a stalling, and I think that's a combination of a couple of different things, from the CDK outage and having dealers sort of pullback and get back in the market that it's creating a little bit of a blip on the radar, but we do believe that prices will continue to fall at a normalized rate for the balance of the year, John.

Great. That's very helpful. Thank you. And then, on credit, Vickie, I think you mentioned that you guys can identify a 30-basis-point improvement tied to the LOS system. How much of the portfolio is that touching? Is there more to go on that perspective of executing better credit?

Yeah, there's certainly more room there. So, as of the end of July, 40% of our portfolio had been originated on LOS and all of our dealerships except for nine of our acquisition lots are being originated -- their deals are being originated on our new system. So that's going to continue to have positive impacts and grow as we move forward each month.

Yeah. I'd add Vickie one other thing, the -- that 30-basis-point benefit, the result of that being the LOS, it's a combination of different factors, right, both qualitative and quantitative in that CECL analysis that are driving that, and the LOS had a more positive effect in that, but the net effect was the 30 basis points. And so, absent other factors, the increase would have been larger, but it's not how it works. We have to sort of look at all the factors there, but I hope that helps add some color to that as well.

Oh, for sure. Thank you very much. And my final question is just sort of on the competitive market, I mean, we've heard that a lot of the kind of smaller channels or smaller networks have been having tough times getting financing. So, I'm wondering if that's impacting kind of the competitive environment at all. Similarly, is there more acquisition opportunities because of some of the stress in the market?

Yeah, we continue to see that stress out there with some of the smaller competitors where they're just holding less inventory or financing less because of their ability to access credit. So that's certainly playing a role in this market. And yeah, we have visibility to several acquisition opportunities. We always want to ensure that we're able to integrate them and digest them at the appropriate method and not disrupt their business and that they're going to fit in well culturally with us and be accretive on day one. But we do have visibility into several -- fitting into our footprint is important as well so that we can ensure that we can service them and take care of them, but we continue to analyze those.

Wonderful, guys. Thank you so much.

Thank you. [Operator Instructions] Our next question comes from Vincent Caintic with BTIG. Your line is open.

Hi, good morning. Thanks for taking my questions. First question is kind of a maybe broad industry question, but, on the affordability point, is there a price or sort of like how much does used car prices have to come down in order to get the demand to show up? We've talked about affordability for a while. So, I'm just trying to get a sense for what's maybe the limiting factor or how much prices have to come down for the demand to really ramp back up again. And then, the visibility on your sales volume. So, we have been seeing quarterly improvements in the year-over-year trajectory, but just wondering if you have that visibility into when we can expect growth again. Thanks.

Vickie, I'll take that one.

Okay.

Good morning, Vincent. How are you doing? So, in terms of visibility into sales, there's like -- there's a ton there. We look at website traffic as a leading indicator. And so, we feel really confident about that. We have probably five or six months in a row now where website traffic is in excess of 25% growth year-over-year. And so, that's certainly a leading indicator that expresses demand for the service in our offering. And we've seen credit applications sort of dovetail into that, but not the same level of strength. And those continue to bubble around a little bit. We see stronger online applications and then weaker applications at the lot level. In the aggregate, the total application volume might be 5% or 8% off year-over-year. From the sales side, we continue to convert at a better rate on those applications. And so, we're really pleased with that, but we'd like to see conversion stronger. And when we look at website activity and analytics around that, a lot of this is -- you can see the customer searching for vehicles and clicking through vehicles, and we might not just have the right vehicles to serve them. And so that sort of ties into our thesis on affordability. For us, given where we see application volumes, if we could take out $500 to $800 out of the procurement costs of the vehicle, that would put us in a really good spot and increase our addressable market. And so that's sort of what we're really focused on and thinking how quickly can we get that done in the balance of the calendar year. That is sort of like really where the teams are pushing hard and focused on. We started to see some of that price benefit show up here…

Doug, I would just add, these should pay dividends as we move forward, particularly as we are a little more cautious on our underwriting. And then, we're still taking charge-offs on this back book due to the pricing from the prior two years. But as we move forward, this will really be a benefit in terms of net charge-offs, especially if we can build back retail units as well.

Great. That's super helpful detail. Thank you for that. So, that $500 to $800 cost per vehicle, if you can take that out, that puts you in a good spot. And then, actually, if you could talk a little bit more about that performance managing location? So, restricting capital to that underperforming stores, that would have been 2,000 units by your math. If you can talk about what you're doing there to get those underperforming stores to be better, or otherwise, using that capital -- allocating that capital better that would be helpful to understand. Thank you.

Yeah, sure, Vincent. That part is not that complicated. We sort of restrict the amount of inventory and get really selective on the underwriting standpoint on what we're allowing them to put on the road, because we're seeing default rates at those stores that are unacceptable. And so, we were trying to figure out is that a function of the environment or what's going on in the town or is that a lack of operational execution. And so, once they sort of get added to the list, we become hyper-focused on what that looks like, which has an impact on sales, right? And so, that's that portion of it. When we see a turnaround in that, we will sort of take off the restriction in capital and then start to feather in underwriting standards that are a little bit looser. For the ones that we don't see turning around, then we'll wind down locations. And so, we have a couple of those that are in that state. If you look just over the last year, we closed three locations, and that's got to be sort of a more active piece of our repertoire on how we manage the business going forward as far as I'm concerned. We need to be making sure we're looking out at that and more closely at that, especially that all the tailwinds of the pandemic are gone. You really have to sort of stay very close and attuned to that. So that's a piece of our business on the operational side for sure.

Okay, great. And then, two final questions and these are both just numbers questions. But if you could -- so in terms of your loss expectations between the fiscal 2022 and 2023 vintages, so the "back book" versus what you're underwriting to now in the 2024 and 2025 vintages, if you could maybe help us bifurcate like what your expectations are for what your underwriting to losses there? And then, the second last question is the -- if you're able to separate out the SG&A expense by your normal operating expense versus the technology investments versus -- and then the new store acquisitions? If you could maybe see what the normalized expenses would have been, that would be helpful to understand the SG&A? Thank you.

Sure. Maybe I'll start with the question you had on the back book, as we're calling it. If you look at our cash-on-cash returns table, I would point to the difference in our projected cash-on-cash returns there for the book of '23 going from 49% now to 64% in '24 and 72% in '25. And then, as we mentioned, 33% or so of the portfolio relates to that back book and that they're now 22 months aged. So, we're getting more than halfway through those contracts and they become a smaller and smaller portion of the business. And so, certainly as we move forward, that becomes a smaller piece of those net charge-offs each quarter.

On the SG&A piece, that is -- so if you look in just absolute dollars here, Vincent, we were fairly flat during the quarter, might have been a $200,000 difference in SG&A cost. And it might not look that impressive, but if you consider any other year, a five-year running average would normally have us up 10%-plus in SG&A. So, the fact that we're relatively flat, I call that a win. That's largely driven by some of the actions that we took last December in terms of cost cutting, which we anticipated to drive $4 million or $5 million worth of benefit on an annualized basis. And so, we're seeing that materialize now more meaningfully. And so, as an example, I think just on the payroll and payroll related costs, Vickie, for the quarter, we were down over $2 million in the quarter just...

Right.

...on that metric by itself. The technology piece that you mentioned, so all this technology now that is now stood up, that does have an impact and it shows up in SG&A. And so, for us, I think, that's probably $1 million quarterly in terms of new expense that we're realizing, but that's been offset by some of the payroll cuts that we've taken in the past. I think there's more that we can do. We're hyper-focused on the management of SG&A. And the acquisitions don't sort of help that story early, because when you're just adding all the cost of new employees and you're buying multi-unit and multi-rooftop operations, you get all of their costs today with none of the benefit of the accounts that they would have. And so, this more recent acquisition should be able to take SG&A on a per account basis down fairly significantly, but we have to let their book build out, right? And so, there's a lot going on there sort of in the complexion of the SG&A. I appreciate your question. It's a thoughtful one. And I'm glad you asked.

That is -- those are all super helpful. Thanks so much.

You got it, man.

Thank you. This concludes the question-and-answer session. I would now like to turn it back to Doug Campbell, President and CEO, for closing remarks.

Yeah. We remain focused on our strategic priorities and improving our operational financial performance with all the technology and innovation updates that we've made, including streamlining our cost structure and delivering affordability to our customers and looking forward to more acquisitions. Our management team is really committed to implementing these initiatives and to deliver additional value for our shareholders. And I want to thank you guys for joining the call today and your interest in America's Car-Mart. Thank you.

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