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CarMax (KMX)

Q2 2012 Earnings Call

September 22, 2011 9:00 am ET


Keith D. Browning - Executive Vice President of Finance and Director

Thomas J. Folliard - Chief Executive Officer, President and Director

Katharine W. Kenny - Vice President of Investor Relations

Thomas W. Reedy - Chief Financial Officer and Senior Vice President


Scot Ciccarelli - RBC Capital Markets, LLC, Research Division

William R. Armstrong - CL King & Associates, Inc.

Himanshu Patel - JP Morgan Chase & Co, Research Division

Rod Lache - Deutsche Bank AG, Research Division

Ryan Brinkman - Goldman Sachs Group Inc., Research Division

Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

Patrick Duff

John Murphy - BofA Merrill Lynch, Research Division

Mark D. Mandel - ThinkEquity LLC, Research Division

Simeon Gutman - Crédit Suisse AG, Research Division

Efraim Levy - S&P Equity Research

Jordan Hymowitz - Philadelphia Financial

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division



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Good morning, my name is Reshira, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter Fiscal Year 2012 Conference Call. [Operator Instructions] Ms. Kenny, you may begin your conference.

Katharine W. Kenny

Hi, it's Katharine Kenny, thank you all for joining our fiscal second quarter 2012 earnings conference call. On the call with me today, as usual, are Tom Folliard, our President and Chief Executive Officer; Tom Reedy, our Senior Vice President and CFO; and Keith Browning, our Executive Vice President, Finance.

Before we begin, let me remind you that our statements today regarding the company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current knowledge and assumptions about future events that involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them.

For additional information on important facts that could affect these expectations, please see the company's annual report on Form 10-K for the fiscal year ended February 28, 2011, filed with the SEC. I'll turn it over to Tom.

Thomas J. Folliard

Thank you, Katharine. Good morning, everyone. Thanks for joining our second quarter conference call. Well, despite a decrease in used unit comps of 2% we reported strong financial results for the second quarter. While we were disappointed by this moderate decrease in sales, we believe it was largely due to the weak economic environment and lower consumer confidence.

Factors that contributed to our results included the following: total gross profit for CarMax increased by 1.5%; gross profit per unit was relatively flat at $2,178; our wholesale business was again a strong contributor to our results; unit sales grew by 23%, largely due to a continuation of the increase in appraisal traffic that we've seen in the recent quarters; our appraisal buy rate was also at a historical high of around 30%; and wholesale gross profit per unit grew by $71 to $921 per unit.

Our CarMax Auto Finance also reported a substantial increase in quarterly income. Tom Reedy will give some details in a moment. The average selling price of our used vehicles increased over 7% compared to last year's second quarter, largely due to a continued increase in wholesale prices. Our mix of vehicles sold was relatively stable for the quarter. And now I will ask Tom to share some information about CAF and our finance business. Tom?

Thomas W. Reedy

Thanks, Tom. Good morning, everyone. As you saw in the release, CAF income this quarter increased $11 million or 21% compared to the second quarter of fiscal 2011. Overall, the CAF portfolio grew 9%. Net loans originated was up 27% versus Q2 of fiscal 2011 due to higher CAF penetration and an increase in average selling prices. As mentioned last quarter, we are retaining a greater portion of loans that CAF historically approved but in recent years have been purchased by third-party partners. As a result, CAF's net penetration for the quarter was approximately 39% versus 32% in Q2 last year and 34% last quarter. Obviously, we expect this approach to make more money for CarMax over time, but there is a negative on impact third-party's finance fees relative to last year.

CAF's interest margin expanded to $86 million or 7.5% of the average amount of receivables versus 6.9% in Q2 last year. Interest in fee income grew by approximately $4 million as the increase in the volume of managed receivables more than offset the decline in interest income as a percent of managed receivables. Portfolio interest expense is down $9 million year-over-year, as older higher cost securitizations paid down and deals with lower interest cost become a greater portion of our financing.

Second quarter interest expense also benefited because we delayed in accessing the public ABS market for funding. Consequently a higher portion of our managed portfolio was financed in warehouse facilities, which are short term and lower cost. As you may have seen, we priced our 2011-2 term securitization last week. The white interest margin environment we've been referencing before continues.

Our provision for losses in the quarter was up approximately $2 million year-over-year. This is in line with our expectations given we are back to retaining a full spectrum of credits. As far as credit availability in the stores, about 85% of our customers who applied for financing received an approval from at least one of our in-house lenders. This is as high as its ever been similar the last quarter. Sub-prime penetration was consistent with last year at approximately 7%.

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