Hank Henderson - Chief Executive Officer Jeff Williams - President

John Rowan - Janney Montgomery Scott Brian Hollenden - Sidoti and Company

Good morning and thank you all for joining us. We are pleased to report an increase of earnings per share for first quarter this year, earning $0.90 per share, up from $0.87 for the same time last year.

We had an increased sales productivity on a constant basis going to 28.2 from 27.9 last year, which is solid improvement. And there is still room for much more improvement with this number as we had many stores with the capacity for more sales.

And our intent is to continue to grow those in a solid manageable fashion. The company clicks up on average sales for store quite is significant improvements in the bottom line as long as we do so while not sacrificing quality.

While we didn’t see an increase in the overall unit volumes as we were working with the slightly lower store count, it was 140 this year versus 143 same time last year. The improved per store numbers is a very positive move and we feel confident that the overall quality of our underwriting in the inventory is better this year than last.

We’ve made improvements to our underwriting system throughout the year, and we’ve also seen solid improvements in our inventory purchasing in this first quarter. For the same money, we’ve been able to lower the average age of the vehicle we're putting on the road by over a year, and it was also slightly lower the average mileage.

Better underwriting and better inventory obviously sets us up for better returns. But to be realized, it also must be supported by very ongoing customer service and that is our focus.

So I'm going to go ahead and turn it over to Jeff to give you the details on the recent result and then I will come back to you for the few final comments regarding our upcoming transition that was mentioned in the press release.

Okay, thank you, Hank. For the quarter same-store revenues was up 2.1%.

The 0.4% overall increase in revenues resulted from a 12.3% increase in interest income, and 1.1% decrease in sales which related to the effect of the eight dealerships that have been or are being closed. Revenues from stores in the 10-plus year category was up just slightly 0.2%, stores in the five-year to 10-year category was up 4% to about $25 million and revenues for stores less than five-year of age category was up about 7% to $26 million.

It was nice to see the overall revenue increase and to see many of our older dealerships show improvement. We will continue to push several initiatives, including inventory improvements, which are underway that we believe will help us going forward on the revenue side.

We will also continue to improve our lot level sales execution, including training and support and efforts related to prospecting; all in effort to increase quality, lot traffic and closure rates for better customers at our dealerships. At the end of the quarter, 32% or 23% of our dealerships were from zero to five years old, 26% or 19% where from five to 10 years and the remaining 82 dealerships were 10 years order or oldest.

Our 10-year plus lots produced 30.5 units sold per month for lot the quarter compared to 30.6 for the prior year quarter. Our lots in the five-year to 10-year category produced 26.6% compared to 25.7% and the lot from less than five-year age bucket had productivity of 23.5% compared to 22.3% for the first quarter of last year.

Our average selling price decreased just slightly to 10,386.1% or about $7 compared to prior year, and decreased $268 or 2.5% sequentially, which is common for our first quarters. The flattening out of our sales prices has been expected, and we currently anticipate flat to some minor increasing overall sales prices for the near-term, as the demand for our cars that we buy is still high, especially for trucks and SUVs.

But we’re hopeful that prices will continue to soften compared to prior years and that will be in a position to continue to put our customers in better cars for the same money. As we’ve said repeatedly, decrease in car prices is actually a good thing for us and does not necessarily mean that our overall sales prices go down.

Our down payment percentage was 6.2% that’s up from 6% for the prior year. Collections, as a percentage of average finance receivables, was 12.4% compared to 13% last year.

Our average initial contract term was 29.8 months compared to 29.3 for the prior year quarter. It was down from 30.7 for the fourth quarter.

Our weighted average contract term for the entire portfolio, including modifications, was 32.6 months, which is up from 31.7 at this time last year and basically, it was flat sequentially. The weighted average age of the portfolio was up to 8.9 months and that compares to 8.4 months at this time last year.

For competitive reasons, specifically for those customers that have more choices, our term lengths may continue to increase some into the future. But we remain committed to minimizing any term increases.

We must always focus on affordability and better customers can and do demand lower more affordable payments, so it's always a balance for us. As always, we will try to ensure that the term length and the useful life of the vehicles are in alignment.

And we will continue to put our customers in good vehicles to improve their success rates. Interest income was up $2 million compared to the prior year quarter due to the $27.3 million increase in average finance receivables; that was about half of the increase and the other half related to the fact that the interest rate on our contracts is now 16.5%, up from 15% prior to May of 2016.

The weighted average interest rates for all finance receivables at the end of the quarter was right at 16%, and that’s up from 15.2% at this time last year. For the quarter, our gross profit margin percentage was 41.4% of sales, that's down just a little bit from 41.8% for the prior year, and it was basically flat sequentially.

The decrease resulted mainly from higher claims under our payment protection plan product. We are pleased with our continuing efforts to improve the quality of our inventory and improve inventory turns and efficiencies; and these efforts are having a positive effect, and will continue to benefit us as we move forward.

We will remain aggressive with our inventory management, but we will ensure that we have a good selection of quality cars, trucks and SUVs in our dealerships to attract our target customer. For the quarter, SG&A as a percentage of sales was 18.6% compared to 17.9%.

Overall, SG&A dollars were up by $697,000 for the quarter. As we've discussed, we continue to make additional investments in the General Manager recruitment, training and advancement areas, collection support and marketing; and our increased SG&A relates primarily to these areas.

Our plan is to leverage these investments overtime as we grow. We will always watch our cost and be very frugal, but we will also ensure that we have an infrastructure in place to support our valued customers at the highest level.

This is a high touch business. For the quarter, net charge-offs, as a percentage of average finance receivables, was 6.4% that's up from 6.2% for the prior year quarter.

But it's down from 8.7% sequentially due to seasonality; the increase resulted from a higher severity of losses as our frequency of losses was flat. Excluding the eight dealerships that are closed or winding down, net charge-offs, as a percentage of finance receivables, would have been 6.2% for the current quarter, which is flat from the prior year.

Remember that we did comment between quarters with 3.6% 30-plus this year and last year we came into the first quarter with 3% 30-plus number. So the fact that we ended up flat is a testament to the progress we’re making on the collection side, so we’re very pleased with that.

Our wholesale value recovery rates continue to come under pressure, but they’ve leveled off; in the last few quarters, recovery rates for the quarter were again in that 22% to 23% range, with basic cars continuing to drag down those percentages. Principal collections, as a percentage of finance receivables for the quarter, was 12.4% compared to 13%; the decrease related mostly to the average term being a little longer; but also it related a little bit to higher levels of contract modifications as we work with customers individually; a lower level off early pay-offs; and the increase in our contract interest rate, offset by a higher average age of our receivables.

The lower collections percentage resulted in about 50 basis points increase in the provision for credit losses on the income statement, as we reserve 25% of uncollected AR. Between the effect of the closed dealerships and the lower collection percentage, for the reasons mentioned above, credit losses would have been about 70 basis points lower or about 26% for the quarter.

We continue to believe that we’re selling a higher quality vehicle; as I mentioned, the improvements with the age and mileage to better credit risk customer. We believe that our customer services levels are continuing to improve.

And when combined with us providing our customers affordable, dependable vehicles, we expect losses to trend downward overtime. At the end of July, our total debt was $118 million and we had almost $79 million in additional availability under our revolving credit facilities.

Our current debt to equity ratio was 49.5% and our debt to finance receivables ratio is 24.3%. We have significant room to grow, and there is a high of demand for what we offer, especially as we continue to improve our customer relationships in the field.

We know we can do improve consistency results with existing dealerships. And we are recruiting, training and supporting our future general managers at a much higher level to allow us to grow our bench of talented associates to someday get the keys to their own dealerships.

Our intense focus on cash-on-cash returns allowed us to grow receivables by almost $17 million and repurchase $3.7 million of our stock, while actually paying down debt during the quarter. We have now repurchased right at 42% of our Company for about $160 million since 2010 at an average price of about $32.

It’s a very exciting time for Car-Mart, and our plan is to grow the business in a healthy efficient manner, and continue to repurchase shares opportunistically. Now, I'll turn it back over to Hank.

All right, thanks Jeff. So as you saw on the press release, effective at the end of this calendar year, I will be stepping aside as CEO and Jeff Williams will be taking on the role.

I’ve been with the Company for over 30 years now serving as CEO for the past 10 years as President and COO for many years prior to that even other various capacities for that as well. It has been an incredible fantastic experience to being part of such a great team of people to help and build and grow this Company into what is today, and I feel truly blessed to have had this opportunity, our tremendous amount of gratitude to the hard working dedicated people with such high characters that have been so very fortunate to work with throughout this time.

We’ve been through some great time and we've been through some very challenges times to get in all along the way, they fought hard to preserve our Company culture. And I cannot even begin to ever thank them all enough for their tireless efforts.

Also, although they’re no longer with us, I would be remised if that did not include listening that I'm also very grateful to our Founder, Bill Fleeman and Nan Smith for establishing the foundation of such a strong culture, and for putting such great trust and confidence in the young man many years ago. And going forward, and I will still be around, and give Jeff and senior management my full support in any and every way I can to help us assure we continue to move upward and onward.

We got a lot of great things happening here now, and I am fully committed to doing my part to keep that momentum growing. That does conclude our prepared remarks.

So we would like to move on now to your questions. Operator?

Jeff, congratulations and Hank good luck. Just couple of actually pretty quick questions.

Jeff, I think -- I wasn’t sure for your talking about just loan modifications, but you mentioned something about reserving in 25% of AR. It’s a little bit lower than the allowance balance ratio a little higher rather than the allowance ratio right now.

Is there a reason why? Well, would the overall allowance ratio move up to 25% or stay where it is based on the comments that you made?

It would stay where it's at. The comment was just to say that anytime your collections are little less as a percentage your income statement provision is going to be a little higher, just for those uncollected dollars.

But the 25% is what has been for a while, and that’s where we expect it to be, going forward.

I was glad to see the productivity come up on a per month basis per store. Is there any read through there as far as what's happening on the competitive front?

I mean, obviously, we are starting to see a little bit of weakness in sum-prime consumer credit availability. Any comments you would like to make on that.

I think there’s a few things. I think there is a little bit of tightening out there.

So it's also -- just talking with our managers, I think we mentioned this the last time we all spoke. We’re seeing some customers circle back, they’ve been over there and tried the other side and now they’re back.

And I think that’s evident and are actually our sales for peak customers is maybe at an all time high, it's very high during this first quarter. And then also I think we’re getting a little, as we mentioned, doing little better job with our inventory, seeing some improvements there.

And so I think all those things combined help push up the store productivity.

And then going back to the inventory. Obviously, you talked a lot about car prices coming down and that helping you, provide a better car to the consumer at the same price.

Can you maybe help us understand how much of a better car you’re providing, whether it's 10,000 or 20,000 miles less on the odometer or one or two mile or years newer. Just help us frame out what type of difference the consumers are seeing in the inventory in the car for the same price when they walked in the dealership.

As far as the stats you mentioned, the mileage is only slightly less. It’s not as significant as those numbers you mentioned it's just a few thousand miles under comparatively quarter-to-quarter.

But it's probably one of the biggest improvements we’ve ever seen in the year. We’re actually comparing the same time frame last year.

We were actually a little better, little slightly more than a year's difference, and that is significant. But also along with that, just being more selective and seeing a lot out there where the market is good, just two cars side-by-side same year making model, can have a lot of differences.

And so I just think overall we’re buying a better car. One of the conversations simply we’ve had here are not real complicated, but going back some time, we were just asking the question that how many of these need repairs and need work and trying to be more selective in buying few of those and need any help.

And I think we’ve been successful with that. And then certainly, it is also showing up in some reduced repair expense, which is helping the bottom line.

And John, as credit gets a little tighter in the markets above us, the flow of product then in our market becomes much better. We've been in a period for several years now where the flow into our markets has been stuck, it maybe the new car dealerships because that financing has been available.

So as tightens up, we get a better flow of products and we get to start cherry-picking a little bit.

The year-over-year decline in gross margin is that due to vehicle mix or recovery value. Can you provide a little more color on that?

Yes, that mostly just related to some higher claims volume and cost on our payment protection plan product with the decreasing wholesale values. One negative is when a car is wrecked, it becomes subject to being told a little quicker than it used to be.

So our claims experience and our losses for that add-on product have been a little higher than last year, but that's the primary reason for the slight decrease in that percentage.

And then we saw flat retail sales prices year-over-year. Do you now have the optimal mix of trucks and SUVs, or should we expect prices to increase?

I think, probably they’re always a little short on trucks and SUVs. So we'd love to be able to see the flow of those products come in our markets a little more easily and that would certainly help keep that sales price up, and maybe even increase.

And I think we've got some room on the mix to continue to try to get more trucks and SUVs.

And then you mentioned in the press release, but could you give maybe a better outlook on the timing in terms of what you’re thinking about in terms of new dealerships?

Well, we’re working on getting our bench strength up, and we've got a lot of dealerships out there now that have General Managers that are newer in their tenure. So we've got little seasoning to do.

And we do have so much opportunity, as Hank mentioned, to increase volumes in the existing 140 dealerships and to improve profits with what we have. We're not going to rush new store openings, because we've got so much potential of existing dealerships.

But our goal, overtime and we don’t have a specific time, is to really get a strong bench there. But we don’t have a specific timeline on that.

And then last one from me. With Jeff taking over CEO role at the end of the year, are you looking for a new CFO internally or externally?

Just what's the transition look like there?

We are in process and we’ll have some news for you guys just as soon as we can.

All right. Well very good.

Thank you all for joining us this morning. And as I mentioned, we’ve got lot of really good thing going here, the attitudes are good, lot of optimism.

So we're going to stay with that and keep the momentum as we mentioned before. And hopefully, come back to you guys with continued improved results.

So you guys all have a great weekend. Thank you very much.