The CFO and CEO discuss Americas Car Mart's fiscal 2025 second quarter results, highlighting new loan origination system improvements and cash on cash returns, with a reminder about forward-looking statements.

The company amended its revolving credit facility for added financial cushion, raised $74 million through new share issuance to bolster the balance sheet amid marketplace challenges and inflationary pressures. It is also exploring initiatives to expand funding programs, including increased warehouse capacity, a redesigned floor plan facility, and a specialized line of credit for receivables from acquired dealers, aiming to enhance overall availability, optionality, and build redundancy in the funding structure.

The company successfully completed its fifth ABS transaction, oversubscribed at over Ed Ed billion dollars in demand, achieving the tightest spreads to date. The introduction of Los underwriting has shown a 21% improvement in cumulative net losses, particularly benefiting the riskier customer cohorts. Additionally, the company welcomed a new Chief Operating Officer, Jamie Fisher, to further accelerate growth.

The company adjusted its revenue recognition period for service contracts due to customers reaching mileage limits earlier, accelerating $13.2 million in revenue. This change, alongside a decline in retail units sold and an increase in interest income, affected total revenues, which decreased by 3.5%. The company also noted improvements in gross margin percentage, attributed to procurement initiatives and a partnership with Cox, aiming for further enhancements in vehicle affordability and gross margins.

The net charge-offs as a percentage of average finance receivables decreased, attributed to improved underwriting and larger down payments, particularly from higher-risk customers. Originations continue to impact the allowance for credit losses, though improvements are seen in collections and term distribution, optimizing contract terms based on customer credit scores. Monthly collections have also shown a significant increase over the previous year and sequentially.

Delinquencies improved to 3.5% at quarter end, with SGNA expenses up by 5.7% mainly due to recent script acquisitions. These acquisitions are projected to add over 5,000 accounts, impacting short-term SGNA efficiency per customer. Interest expense rose by 8.8% due to increased rates and debt, but saw a sequential decrease. The company holds $8 million in unrestricted cash and has $97 million available under revolving credit facilities.

The company successfully launched a pilot for risk-based pricing in select markets, utilizing a new scorecard to refine applicant pools and predict losses, aiming to retain and grow business while improving competitiveness and returns. Credit team's timely execution has led to positive preliminary results, with expectations for continued benefits in affordability and gross margin improvements. Stakeholder focus and team contributions are highlighted as critical to the company's future growth and profitability.

The company discussed a significant one-time adjustment in service contracts due to a shorter usage period than expected, leading to a positive impact on future gross margins. They also reviewed their underwriting strategy, noting a focus on higher-risk customers with tighter down payment requirements, particularly for lower-rent customers, with minimal changes to initial underwriting policies since introducing new underwriting strategies. Furthermore, they shared expectations for the upcoming tax refund season, acknowledging the atypical patterns of recent years due to factors like stimulus and inflation.

Despite recent market volatility and software issues affecting pricing, the team has capitalized on opportunities and is preparing early for the tax season with new strategies and the addition of a valuable team member.

There's significant M&A activity focused on building small teams, with minimal competition. The environment is challenging due to higher interest rates and floor plan costs, leading to a need for assistance. Selective conversations are yielding fruitful opportunities, pending proper funding setup for future engagements.

The discussion highlights the positive trend in credit performance and the impact of portfolio evolution on expected losses and credit reserve rates. With the ongoing improvement in the loan origination system (LOS), the organization anticipates continued benefits, aiming to serve more customers through risk-based pricing strategies. The speaker emphasizes the need for time to fully understand the outcomes of these changes, particularly as they introduce new pricing mechanisms and expand their customer base, learning from ongoing trials.

The company is reassessing its dealership portfolio, selling or shutting down older businesses requiring significant investments and adding new ones. Performance and underwriting control at a rooftop level influence decisions on managing originations and shaping the overall car market company.

The speaker discusses the necessity of evaluating sales volumes and market conditions, highlighting the impact of long-term market presence and the closure of manufacturing plants. They emphasize the importance of prudent capital deployment, seeking healthy volumes and returns, and exploring new opportunities. Additionally, they mention the desire to complement their footprint and leverage partnerships for operational management and increased gross margins.

The company discusses strategies to responsibly loosen credit restrictions for high-end customers, aiming to regain lost volume and attract more business from these segments with higher incomes, particularly in states like Arkansas, Missouri, Texas, and Oklahoma. Adjustments include potentially yielding on lower rent customers, incentivizing stronger down payments, and serving customers previously priced out due to inadequate return strategies.

The discussion highlights the significance of consumer confidence in driving transactions, noting recent spurts in consumer activity, particularly among lower-income demographics and in certain states. The speaker emphasizes adapting business strategies to support consumers intelligently, utilizing available tools while managing risks amid current economic uncertainties, aiming for a bright future.

The decision to raise equity was considered the right move for the company, balancing the need for funding with minimally dilutive actions. Factors like falling interest rates and upcoming initiatives influenced the choice not to pursue more aggressive acquisitions, aiming to benefit customers and provide management with a strategic advantage for future growth.

After the queue of questions concludes, Doug takes back the call for closing remarks, thanking everyone for their interest and announcing the end of the conference call.