Good day, and thank you for standing by. Welcome to America's Car-Mart's Third Quarter Fiscal 2024 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. 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 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 of supplemental material. 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 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 Exchange Commission on Forms 8-K and 10-Q. I will 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 produce don't align with the level of effort or 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. I'm 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 the 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 in navigating an ongoing challenging environment. Throughout the quarter, we reduced the number of unit losses taken when compared sequentially by 9%. As an industry backdrop, delinquency trends worsened throughout the quarter. However, we improved our 30-plus day delinquencies by 30 basis points. This drove a $3.9 million favorable adjustment in the provision for credit loss. We've now completed the planned roll-out of our loan origination system. As with the implementation of any large-scale system that is built on change 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 LOS originations driving more money down, stronger consumer profiles, and shortened term lengths. Let me make this point clear: the LOS is a game-changer for Car-Mart, 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. I'll cover this in more detail, but let me start with revenue and sales. Revenue was down 7.9% for the quarter, driven by several factors. First, 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. Those October trends persisted into the third quarter, with overall application volumes softening by 8.3%. The LOS implementation challenges mentioned, along with balancing volume and deal structure, also contributed to the decrease. The benefits of system updates to the LOS, 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 and New Year's Day landing on a Monday added two more closure days to the quarter 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 154 dealerships in January, which kept consumers from shopping. These revenue headwinds were partially offset by a 16% increase in interest income and a 7.5% increase in the average retail sales price. That increase in the average retail sales price was driven equally by a mix of ancillary products sold and vehicle price. You'll hear more from Vickie on the specifics on the LOS 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 that these results are very preliminary in nature, but that's rapidly changing, with now 10,000 originations performing materially different than the loans generated by our legacy system. We plan to share more specifics in the future, but words like substantial and material come to mind when we start to quantify their effect on both the frequency and the severity of loss. We've mentioned numerous times the importance of acquisitions and it being one of the strongest uses of the capital for our Company. We're proud to announce that the purchase of Central Auto in 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 in driving large-scale projects that have driven tremendous value. We've begun to leverage their digital and physical assets as well as their logistics services. This initiative will be centrally managed, removing the day-to-day burden of processing and overseeing the disposal and reconditioning of assets from our operations team. Strategically, we expect this to allow 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 Vickie to cover more details on our financials.

Thank you, Doug. 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, the LOS has allowed us to improve upon our deal structure, with average down payments for the quarter trending up 30 basis points to 5.1%, also up sequentially by 20 basis points. Our originating term was 43.3 months, improved from 44.1 months sequentially, and for the second quarter in a row, they were up from 42.5 months compared to the prior year third quarter. The weighted average total contract term for the portfolio is at 47.6 months, including modifications. The average age of the portfolio improved to nearly 12 months or almost two months better compared to last year. Our total collections increased 9.3%. 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 a supplemental chart on our website that demonstrates our positive cash-on-cash returns over time. This data reflects our history of earning strong cash-on-cash returns in various market and macroeconomic conditions. We're very focused on the quality of originations and deal structure to maximize these returns, and ultimately, our profitability. 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. Net charge-offs as a percentage of average finance receivables were 6.8% versus 5.9% 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 the prior year, which accounted for about 55% of the increase, as well as an increase in severity. Severity continues to be impacted by the longer term lengths; however, that has begun to stabilize. Recovery values for the quarter were approximately 24%. Accounts over 30 days past due improved in Q3, dropping 40 basis points to 3.3%. This was also a 30 basis point improvement sequentially. Our customers continue to face ongoing pressures related to the increased cost for housing, energy, childcare, and auto insurance. However, that's slightly offset by lower inflation in some groceries and fuel. Sequentially, the Company decreased 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. Sequentially, 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 this sequential improvement. It was slightly offset by increased collections cost related to repossessions. Our SG&A per average account was down 6.7% from $451 to $421. We're very focused on cost efficiency while continuing to serve over 102,000 customers and providing quality service. Interest expense as a percentage of sales increased to 7% for the quarter compared to 3.6%. In dollar terms, interest expense increased $7 million due to increasing interest rates and an increase in the average borrowings of approximately $145 million over the prior year. Our funding and financing program remained strong. In December, we called our '22-1 notes and paid them off during the quarter. In January, Kroll upgraded all tranches of our '23-1 notes, and the company completed its fourth securitization at the end of the quarter, issuing $250 million in bonds, with a weighted average fixed coupon rate of 9.5%. In February, we renewed and extended our revolving credit agreement to September of 2025, with a $340 million revolver, along with access to $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 non-recourse securitized notes represent the bulk of our funding, and our cost of funds fluctuates 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.

Thank you, Vickie. February is off to a better start than last quarter. We're closely monitoring our consumer and the tax season. Initial refunds are up slightly year-over-year, but they're running a little behind last year. Affordability continues to be the biggest challenge in our industry. We're all competing for a similarly priced asset 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 and 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 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 Car-Mart's 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.

Thank you. Our first question comes from John Murphy with Bank of America Securities. Your line is open. Please go ahead.

Good morning, guys. Just a first question, Doug and Judy, if you want to come on this as well. When you look at this, you're basically transacting in vehicles that are approaching $20,000 before, and pre-COVID, they were $10,000. I know there's 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 has some very potential big implications for how the business is run and performance over time. And will it go back down over time?

Thank you for the question, John, and good morning. I think you're absolutely right. This is similar to a question we received last quarter, but I’ll address it from a slightly different angle. The $19,000 to $19,500 car translates to around a $570 monthly payment today when considering the origination payment. Breaking that down, much of it is related to pricing, improvements we've made to service contracts over time, and our debt cancellation product, which is a percentage of the transaction price. If we look back just a year ago and normalize for management actions regarding price increases and adjustments to these aspects, the payment today is actually lower than it was a year ago when excluding these management factors. Furthermore, we believe car prices are on a downward trend, with all indicators suggesting they will decrease for the remainder of the year. The speed of this decrease is uncertain, but we believe the second half of the year will bring some relief for both us and our consumers. Additionally, initiatives like our partnership with Cox Automotive will greatly assist us in reaching our goals more quickly and reducing our reliance on the marketplace. Our capability to recondition and repair more vehicles for resale at a lower cost will help bring down prices, and we believe this can be achieved relatively soon.

Good. And that just leads to my second question. Can you talk about what exactly Cox is doing? And when you get into recon, there's all sorts of questions of what level you recon to? I mean, if you're reconditioning a three-year-old vehicle, you want to get close to new. But if you're reconditioning something that's closer to a 10-year-old vehicle, there's a lot of questions as to where you're recon it to. So, you're outsourcing that. 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?

That's a great question. So, today, when we look at the business and we have partners that help us. They're helping us on a store-by-store basis. And so, you can imagine those agreements for repairs are 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 and body repair rates at more commercialized terms for a player our size, I think there's still savings to be had and improve and drive a nicer product in the end. And so, that's our goal. We think there's 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 I'll drop back in the queue. Thank you very much.

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.

Good morning. My apologies if you went over this already, but can you kind of deconstruct the decline in unit volume? I know, obviously, you mentioned weather and a couple of missing days and kind of the timing of sales days in the quarter, but more so just looking at the declining unit volume relative to the reduction in duration, did that have a material negative impact on sales and also whether or not there is anything being driven by any changes in the competitive environment? Thank you.

Good morning, John. I'll attempt to address that. To summarize some of the key points and provide additional details, we observed that the overall market conditions were generally weaker, contributing to about half of the decline. Comparing with competitors, many public retailers reported declines in the single and some in the double digits. Thus, this serves as a benchmark. Another factor we noted was the impact of weather, which resulted in some closure days. The main issue appears to be traffic. We previously stated our ability to drive application volume, which had been quite robust until this decline. More significantly, this decline varies by channel. When we report traffic, it's an aggregate of in-store, online, and application traffic, including data from iPads tracking customers in stores. Some channels saw a larger decline than others, while some experienced improvements, largely influenced by our marketing efforts and operational strategies regarding loan processing. In response, we've slightly adjusted terms from the previous quarter to attract more traffic and have made several tweaks in preparation for the fourth quarter. This gives us confidence that we can regain some volume, and if February is any indication, it seems those changes are beginning to bear fruit.

Okay. And you wouldn't attribute the change in traffic to competition?

No, we're really not seeing that. I wouldn't say that's a major contributor at all.

Okay. All right. Thank you.

You're very welcome.

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 Derek Sommers with Jefferies. Your line is open. Please go ahead.

Good morning. Regarding the decline in unit sales, we noted that 3% to 4% was due to weather, and about half of the remaining decline was linked to lower volumes. Was any significant part of this decline related to credit approval rates associated with the LOS implementation?

Do you want to take that one?

I think there's definitely some impact from restricting underwriting, whether it's related to down payments or other terms. It's challenging to isolate all those factors. However, this is part of the balancing act Doug referred to regarding originations.

Yes.

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.

Yeah. I would also say it'd be hard to measure because on the approval rate line, you'd see a negligible difference, if any. For us, it's the deal structure. We do want that customer, but we want it 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 in when they originate their loan, 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 any more, the thing that we can do to assist them is 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, do you guys have a timeline in mind for kind of full LOS implementation across your dealerships?

Yeah. So, the LOS is implemented across all of our dealerships today, with the exception of our stores that we've acquired over the last couple of years. And they're in their earnouts, and so we don't want to tinker with them while they're during those periods, but they'll be tucked in underneath that shortly thereafter. But all origination volume for our base stores will be pretty much through the LOS. There's one last piece we need to address, which is cross-border state transactions where people drive from Missouri into Arkansas to get a car or vice versa. That's like 5% of the volume, but I think on a go forward basis, greater than 80% of our originations should come from our LOS.

Got it. And then, just one more. Just any kind of commentary on February trends, tax refund, and what you're seeing with the consumer would be helpful.

We noted that tax data has started off slow, with initial refunds down. However, year-over-year they are now up, although they are still about a week behind schedule. We are closely monitoring our third-party tax partners, the IRS data, and our application data. Anecdotal evidence from our stores suggests that some of this data may simply be delayed. I'm encouraged that February has started off better than last quarter, indicating an upward trend. If some sales are indeed pushed into March, that's positive, especially considering we have a long March with five weekends. We're looking forward to a strong month.

Thank you, guys. That's all for me.

You got it, Derek. 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 was stronger GPUs, is there the potential to take pricing down in GPUs a little bit lower to drive volume? And how are you making that decision in a new world order?

Vick, you want to get that?

That's definitely an option. Most of the changes in the GPU have been focused on improving efficiencies related to repair costs and optimizing vehicle movement. However, pricing is something that we will consistently evaluate as we progress.

Yes. I think the historical gross profit average is really driven off a 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 are volumes in a normal run rate with this new LOS. And I think when we see that sort of normalize and get in a good spot, then that's certainly an option for us as well.

Okay. And there's one other on the acquisitions, not totally new to the story, but sounds like they're going to ramp up significantly as you're going through this ramp in the LOS, and then thinking about integrating new stores 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, in that this is a business that these owners have built up over a significant amount of time, and it's kind of their baby and 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 till 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, and we have several in the pipeline that are getting close to being able to be closed on. So, that was in relation to our comment that we are expecting some others before the end of this calendar year.

Okay. Thank you very much, guys.

Thank you, John.

Thank you. I'm showing no further questions at this time, and I would like to hand the conference back over to Doug Campbell for closing remarks.

Thank you very much. I'm really excited about all the initiatives we have in progress, and I appreciate the hard work from our team. They continue to rise to the challenge and support our customers. Our main focus remains on ensuring our teams and customers succeed. Considering our initiatives and the partnership with Cox, our mutual commitment to customer success will make for a strong collaboration. I'm looking forward to that. Regarding the LOS, I'm pleased the implementation is complete. Going forward, I’m eager to see its positive impact on our business. We've added a supplementary slide on our cash-on-cash returns, and the projections for the third quarter show significant improvement, already reflecting the LOS's influence on our financials. We're very optimistic about the Company's future and believe these initiatives will enhance earnings and shareholder returns. 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.