America's Car-Mart, Inc.

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 speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Vicki Judy, Chief Financial Officer of America's Car Marks. Please go ahead.

Good morning, and welcome to America's Car Marks first quarter fiscal year 2025 earnings call for the period ending July 31st, 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 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, 2024, and our current and quarterly reports furnished to or filed with the Securities 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, Vicki, 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 partnership is centrally managed, removing the day-to-day burden from our location managers to oversee the complete process for the disposal of our assets. We've been optimizing agreements with vehicle repair shops and consolidating suppliers to lower acquisition and transportation costs. We've set new expectations for vehicle quality, especially with preferred vendors, and continue to consolidate vehicle vendors. The vendor consolidation process is also improving title flow, which speeds up the time in getting inventory to the sales lot and then displayed online. For example, In fiscal year 23, we purchased an average of 10 vehicles from close to 400 vendors monthly. In fiscal year 24, we dropped that to roughly 270 vendors. And this year, we plan to bring that down to under 200 vendors. While we still need local relationships in many markets that we operate, the partnership with Cox Automotive is giving us additional options. Like any transition, the onboarding process of a new partner for our business operations is not without its challenges. We believe those are mainly behind us now as it relates to the procurement and the remarketing of vehicles. I'll switch now to the consumer facing aspects of our business. The LOS is fully in place at 147 of our 156 dealerships. The remaining nine dealerships which were acquired are still in their earn out period or have yet to be integrated. As of July 31st, almost 40% of our total portfolio dollars originated within the LOS. The speed at accomplishing sales and financing process is at least one hour faster for each customer. Because more of these sales are starting online, it allows for a better overall customer experience. And we're pleased to see this kind of adoption. And it gives us additional data on consumer preferences and the pre-qualification trends we're seeing. The benefits from LOS that we discussed last quarter, which include curtailing originating terms, generating better deal structures, and ultimately improving loss rates, continue to build momentum. Deals originated through the loan origination system versus our legacy system have a lower frequency and severity of loss, thus producing a lower overall cumulative net loss rate than loans originated during the same period. This improvement is also very much in contrast with our back book of originations, which are now approximately 33% of our portfolio when looking at overall fiscal year 2023. I'll let Vicki get into more detail here in a moment on that. We're moving quickly to reshape our future without changing our core mission, keep customers on the road. Our initiatives are strengthening CarMart's competitive position, enhancing our ability to innovate, and increasing operational efficiency. I reported last quarter on the implementation of additional multi-year tech investments in our business. Specifically, and Enterprise Resource Planning System, or ERP. This was a significant multi-year investment and it's weighing on our operating expense line. The benefits of this ERP conversion are designed to improve efficiency and operational flexibility within finance, accounting, and customer management functions, and provide capacity for growth. We went live on the system on May 1st and are confident that we can help provide leverage in SG&A. We also completed important enhancements to our CRM during the quarter, which are designed to assist us in credit application conversion. A better customer experience will drive higher conversions to sales. We're very pleased with the recent addition of the two dealerships at Texas Auto Center, which delivered strong results as expected in the quarter, including a record month in July. We have ambitious plans to grow America's Car Mart and become a more dominant company in our segment. This is evident in the turnaround we're beginning to see. Our teams will be a key component of our success. I'll now turn the discussion over to Vicki for more details on our financials. Vicki?

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 the 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% 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 paycheck. 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 back 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 down payments and deal structures. Down payments for the quarter were up 20 basis points to 5.2%. While this is not an enormous increase overall, the distribution of the down payment 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 down payment. Our average originating term was 44.3 months, down from the prior year's quarter average of 44.7 months. Like the down payment, we continue to fine-tune and optimize the distribution of the term by customer score. At the end of the quarter, the weighted average total contract term for the portfolio is 48.1 months. The weighted average age is 12 months or up 16%. This should have positive impacts on the portfolio losses going forward and have contributed positively to the increased collections per active customer. Our management and dealer teams have worked hard to improve total collections, which increased 4.3% over last year. The monthly average total collected per active customer rose to $562 from $535. More customers are paying via digital channels, but it is valuable to leverage our hybrid approach because the local face-to-face relationship is a difference maker when they need contract modifications or assistance. Net charge-offs as a percentage of average finance receivables for the quarter were 6.4% compared to 5.8%. We experienced an increase in both the frequency and severity of losses with severity accounting for approximately 65% of the increase. The majority of this increase continues to be from the back book of the fiscal year 22 and 23 origination. These originations now have a weighted average age of approximately 22 months at the end of July and are expected to have less of an impact on that charge off as we move forward. The net charge-off percentage is trending back to pre-pandemic averages and is closer to the low end of our historical range of 5.9% to 8.7%. Our priority is customer success and to work with them to resolve payment delinquencies before repossessing the vehicle. We're pleased that our delinquencies or accounts over 30 days past due dropped 90 basis points to 3.5% at quarter end and our recent fee was over 82% for the quarter. The results we're seeing from our LOS originations were the primary driver in a 30 basis point improvement in our allowance for credit losses as a percentage of finance receivables, net of deferred revenue, and accident protection plan claims. This puts the allowance at 25% at quarter end, which resulted in a $4.3 million reduction in the provision for credit losses. Inventory levels at quarter end were up $7.1 million compared to fiscal year end, primarily due to the addition of our most recent acquisition, which added approximately $5.1 million to the inventory balance. Despite this addition, we reduced inventory by $2.6 million compared to the prior year quarter end. We've been sharing our cash on cash returns profile during this past fiscal year and are pleased that our originated contracts in the first quarter are expected to produce cash-on-cash returns of 72.4%. The supplemental material to the earnings release 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 structures to maximize these returns and profitability. Moving to SG&A. SG&A expense was $46.7 million. This was a slight increase compared to last year's first quarter. As mentioned in the release, we had over $2 million in savings and payroll and related costs due to prior cost-cutting measures. This was offset by increases in the licensing and expenses related to our technology implementations, along with the increased SG&A related to the acquisitions, which created some headwind in leveraging the SG&A on a per-customer basis. As we move forward and gain efficiency from the new technology and build the customer base associated with the acquisition, we expect to leverage the SG&A on a per customer account basis over the long term. We continue to focus on driving cost efficiency and continue to execute on cost control measures. Interest expense increased by $4 million or 28.3% due to a rise in rates and secondarily an increase in debt. Our revolving credit facility and warehouse notes payable are floating rate debt, and we would benefit from lower rates if the prevailing thoughts on interest rate cuts come to fruition. As of July 31st, we have $4.7 million in unrestricted cash and approximately $33 million in additional availability under our revolving credit facilities calculated on our borrowing base of receivables and inventory. Access to capital with our evolving credit facility and a successful securitization program give us flexibility and a distinct advantage over many of our smaller competitors. Now let me turn things back to Doug.

Thanks, Vicki. 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. 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 underway, and we'll 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. to capitalize on our partnership with Cox Automotive. I believe this to be a long-term partnership and we're 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.

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster.

Operator, this is Vicki. 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 mentioned the back book and LOS origination several times. Can you explain how you think about the portfolio and how it fits 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 said, 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, you know, 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 adjustments. 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 Heck with Jefferies. Your line is open.

Hey, guys. Thanks very much. Good to meet you, Doug, and Vicki, good to chat. So, appreciate you guys taking my questions and all the details on the call. I have a couple 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. You know, August is sort of a little bit of a stalling, and I think that's a combination of a couple different things, you know, from the CDK outage and having dealers sort of pull back 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, Vicki, I think you mentioned that you guys can identify a 30 basis point improvement tied to the LOS system. You know, 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, Vicki, one other thing. You know, 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 than that, but the net effect was the 30 basis points. And so, you know, absent other factors, the increase would have been larger, but, you know, that'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 smaller channels or smaller networks have been having tough times getting financing. I'm wondering if that's impacting the competitive environment at all. Similarly, is there more acquisition opportunities because of some of the stress in the market?

We continue to see that stress out there with some of the smaller competitors. whether 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 a creative On day one, but we do have visibility into several Fitting into our footprint, you know 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 again as a reminder to ask a question Please press star 1 1 on your telephone and wait for your name to be announced

Again, that is star 1-1 to ask a question. Our next question comes from Vincent Cantik with BTIG. Your line is open.

Hey, 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 cost? have to come down in order to get the demand to show up. You know, we've talked about affordability for a while, so I'm just trying to get a sense for, you know, 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.

Thank you. Vicki, I'll take that one. Okay. Good morning, Vincent. How are you doing, man? So in terms of visibility into sales, 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 and our offering. And we've seen credit applications sort of dovetail into that, but not the same level of strength. And those continue to bobble 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 the analytics around that, a lot of it 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 cost 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 in the quarter when you look at just price by itself. Keep in mind our average retail selling price are a combination of both our ancillary products and the sales price of the vehicle. So we were able to take $100 out. And from a procurement standpoint, we should be able to see more benefits here in the upcoming quarters as well. Aside from that, I guess it's sort of, you know, Vincent, if I'm you and I'm looking at this, the sales volume piece is a really tough question to answer in terms of, like, what does normal look like and how do we get back there? I don't think we've spoken as much on it, but, like, we've talked about performance managing locations. And to us, that's the restriction of capital when we see losses trending up. And we get really sensitive about around that because we want to get the best return on investing capital. And so we have, if I look back at fiscal year 24, we had a nine or 10% disconnect on sales from a year over year standpoint, Vicki, if I'm remembering correctly. A third of that was due to us performance managing locations and restricting capital. So, you know, call that, that's probably somewhere just north of 2000 units just from us performance managing locations. And so when you're looking at this sort of year over year comparison, it's both a combination of what we see in the marketplace and actions we're taking internally to restrict capital to our highest performing stores. And I think that's the best thing for our shareholders and for us. And then of course, if you layer in the fact that we've been more selective on the underwriting side, we've talked about that extensively, and that's gotta be a piece of it, right? There's certainly more customers we can take, but given the backdrop and the context of higher loan delinquency rates and default rates in the industry, we're trying to make sure that we take care of the customers that we do have and that that is sort of front and center. And I think there's some positive tailwinds, right? We made an upgrade to our CRM during the quarter, which should also aid in conversion. We're working on sales price, which should help overall sales volume. And then I touched on the addition of our head of underwriting last quarter. And so the underwriting team is working on ways we can grow sales volume, which look like you know, risk-based pricing, right? And so that would be another functionality of the LOS tool that we really haven't spoken about, but we expect to deploy that during the calendar year. And that would allow us to do a lot of things that would allow us to go deeper and price loans differently if we needed to go deeper down the funnel or to go up funnel to keep more of our repeat customers who might be defecting and looking at other competitors. And so, you know, we're excited about the levers that we have in the business now.

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.

That's super helpful detail. Thank you for that. So that $500 to $800 cost per vehicle, if you can take that out, that's 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. That part's 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're 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 quote unquote 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 you're 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 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. You know, if you look at our cash on cash returns table, I would point to, you know, the difference in our projected cash on cash returns there, you know, for the book of 23 going from 49% now to 64% in 24 and 72% in 25. And then as we mentioned, you know, 33% or so of the portfolio relates to that back book and that they're now 22 months Aged so we're getting you know 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. It might have been a 200 grand difference in SG&A cost. And, you know, 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 percent 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 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, Vicki, for the quarter, we were down over $2 million in the quarter just 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. You know, for us, I think, you know, that's probably a million dollars quarterly in terms of new expense that we're realizing. You know, 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 the 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. 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.

Those are all super helpful. Thanks very 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.

Yep. 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 Karma. Thank you.

This concludes today's Commerce Call. Thank you for participating. You may now disconnect. Music. So, Thank you. 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 speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Vicki Judy, Chief Financial Officer of America's Car Marks. Please go ahead.

Good morning, and welcome to America's Car Marks first quarter fiscal year 2025 earnings call for the period ending July 31st, 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 risk and uncertainty 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 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, Vicki, 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 demands 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 partnership is centrally managed, removing the day-to-day burden from our location managers to oversee the complete process for the disposal of our assets. We've been optimizing agreements with vehicle repair shops and consolidating suppliers to lower acquisition and transportation costs. We've set new expectations for vehicle quality, especially with preferred vendors, and continue to consolidate vehicle vendors. The vendor consolidation process is also improving title flow, which speeds up the time in getting inventory to the sales lot and then displayed online. For example, In fiscal year 23, we purchased an average of 10 vehicles from close to 400 vendors monthly. In fiscal year 24, we dropped that to roughly 270 vendors. And this year, we plan to bring that down to under 200 vendors. While we still need local relationships in many markets that we operate, the partnership with Cox Automotive is giving us additional options. Like any transition, the onboarding process of a new partner for our business operations is not without its challenges. We believe those are mainly behind us now as it relates to the procurement and the remarketing of vehicles. I'll switch now to the consumer facing aspects of our business. The LOS is fully in place at 147 of our 156 dealerships. The remaining nine dealerships, which were acquired, are still in their earn out period or have yet to be integrated. As of July 31st, almost 40% of our total portfolio dollars originated within the LOS. The speed at accomplishing sales and financing process is at least one hour faster for each customer. Because more of these sales are starting online, it allows for a better overall customer experience. And we're pleased to see this kind of adoption. And it gives us additional data on consumer preferences and the pre-qualification trends we're seeing. The benefits from LOS that we discussed last quarter, which include curtailing originating terms generating better deal structures, and ultimately improving loss rates, continue to build momentum. Deals originated through the loan origination system versus our legacy system have a lower frequency and severity of loss, thus producing a lower overall cumulative net loss rate than loans originated during the same period. This improvement is also very much in contrast with our back book of originations, which are now approximately 33% of our portfolio when looking at overall dollar fiscal year 2023. I'll let Vicky get into more detail here in a moment on that. We're moving quickly to reshape our future without changing our core mission, keep customers on the road. Our initiatives are strengthening CarMart's competitive position, enhancing our ability to innovate, and increasing operational efficiency. I reported last quarter on the implementation of additional multi-year tech investments in our business. Specifically, and Enterprise Resource Planning System, or ERP. This was a significant multi-year investment, and it's weighing on our operating expense line. The benefits of this ERP conversion are designed to improve efficiency and operational flexibility within finance, accounting, and customer management functions, and provide capacity for growth. We went live on the system on May 1st and are confident that we can help provide leverage in SG&A. We also completed important enhancements to our CRM during the quarter, which are designed to assist us in credit application conversion. A better customer experience will drive higher conversions to sales. We're very pleased with the recent addition of the two dealerships at Texas Auto Center, which delivered strong results as expected in the quarter, including a record month in July. We have ambitious plans to grow America's car market and become a more dominant company in our segment. This is evident in the turnaround we're beginning to see. Our teams will be a key component of our success. I'll now turn the discussion over to Vicki for more details on our financials. Vicki?

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 the 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% 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 paycheck. 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 back 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 down payments and deal structures. Down payments for the quarter were up 20 basis points to 5.2%. While this is not an enormous increase overall, the distribution of the down payment 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 down payment. Our average originating term was 44.3 months, down from the prior year's quarter average of 44.7 months. Like the down payment, we continue to fine-tune and optimize the distribution of the term by customer score. At the end of the quarter, the weighted average total contract term for the portfolio is 48.1 months. The weighted average age is 12 months or up 16%. This should have positive impacts on the portfolio losses going forward and have contributed positively to the increased collections per active customer. Our management and dealer teams have worked hard to improve total collections, which increased 4.3% over last year. The monthly average total collected per active customer rose to $562 from $535. More customers are paying via digital channels, but it is valuable to leverage our hybrid approach because the local face-to-face relationship is a difference maker when they need contract modifications or assistance. Net charge-offs as a percentage of average finance receivables for the quarter were 6.4% compared to 5.8%. We experienced an increase in both the frequency and severity of losses with severity accounting for approximately 65% of the increase. The majority of this increase continues to be from the back book of the fiscal year 22 and 23 origination. These originations now have a weighted average age of approximately 22 months at the end of July and are expected to have less of an impact on that charge off as we move forward. The net charge-off percentage is trending back to pre-pandemic averages and is closer to the low end of our historical range of 5.9% to 8.7%. Our priority is customer success and to work with them to resolve payment delinquencies before repossessing the vehicle. We're pleased that our delinquencies or accounts over 30 days past due dropped 90 basis points to 3.5% at quarter end and our recent fee was over 82% for the quarter. The results we're seeing from our LOS originations were the primary driver in a 30 basis point improvement in our allowance for credit losses as a percentage of finance receivables, net of deferred revenue, and accident protection plan claims. This puts the allowance at 25% at quarter end, which resulted in a $4.3 million reduction in the provision for credit losses. Inventory levels at quarter end were up $7.1 million compared to fiscal year end, primarily due to the addition of our most recent acquisition, which added approximately $5.1 million to the inventory balance. Despite this addition, we reduced inventory by $2.6 million compared to the prior year quarter end. We've been sharing our cash on cash returns profile during this past fiscal year and are pleased that our originated contracts in the first quarter are expected to produce cash-on-cash returns of 72.4%. The supplemental material to the earnings release 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 structures to maximize these returns and profitability. Moving to SG&A. SG&A expense was $46.7 million. This was a slight increase compared to last year's first quarter. As mentioned in the release, we had over $2 million in savings and payroll and related costs due to prior cost-cutting measures. This was offset by increases in the licensing and expenses related to our technology implementations, along with the increased SG&A related to the acquisitions, which created some headwind in leveraging the SG&A on a per-customer basis. As we move forward and gain efficiency from the new technology and build the customer base associated with the acquisition, we expect to leverage the SG&A on a per customer account basis over the long term. We continue to focus on driving cost efficiency and continue to execute on cost control measures. Interest expense increased by $4 million, or 28.3%, due to a rise in rates and secondarily an increase in debt. Our revolving credit facility and warehouse notes payable are floating rate debt, and we would benefit from lower rates if the prevailing thoughts on interest rate cuts come to fruition. As of July 31st, we have $4.7 million in unrestricted cash and approximately $33 million in additional availability under our revolving credit facilities calculated on our borrowing base of receivables and inventory. Access to capital with our evolving credit facility and a successful securitization program give us flexibility and a distinct advantage over many of our smaller competitors. Now let me turn things back to Doug.

Thanks, Vicki. 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. 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 underway, and we'll 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. to capitalize on our partnership with Cox Automotive. I believe this to be a long-term partnership and we're 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.

As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster.

Operator, this is Vicki. 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 mentioned the back book and LoS origination several times. Can you explain how you think about the portfolio and how it fits 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 said, 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 adjustments. 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 Heck with Jefferies. Your line is open.

Hey, guys. Thanks very much. Good to meet you, Doug, and Vicki, good to chat. So, appreciate you guys taking my questions and all the details on the call. I have a couple 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. You know, August is sort of a little bit of a stalling, and I think that's a combination of a couple different things, you know, from the CDK outage and having dealers sort of pull back 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, Vicki, 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.

I'd add, Vicki, one other thing. You know, that 30 basis point benefit, the result of that being the LOS, it's a combination of different factors, right, both qualitative and quantitative benefits. in that CECL analysis that are driving that. And the LOS had a more positive effect than that, but the net effect was the 30 basis points. And so, you know, absent other factors, the increase would have been larger, but, you know, that'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 smaller channels or smaller networks have been having tough times getting financing. I'm wondering if that's impacting the competitive environment at all. Similarly, is there more acquisition opportunities because of some of the stress in the market?

We continue to see that stress out there with some of the smaller competitors. whether 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, you know 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 again as a reminder to ask a question Please press star 1 1 on your telephone and wait for your name to be announced

Again, that is star 11 to ask a question. Our next question comes from Vincent Cantick with BTIG. Your line is open.

Hey, 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. You know, we've talked about affordability for a while, so I'm just trying to get a sense for, you know, 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 had that visibility into when we can expect growth again.

Thank you. Vicki, I'll take that one. Okay. Good morning, Vincent. How you doing, man? So in terms of visibility into sales, 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 and our offering. And we've seen credit applications sort of dovetail into that, but not the same level of strength. And those continue to bobble 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 the analytics around that, a lot of it 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 cost 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 in the quarter when you look at just price by itself. Keep in mind our average retail selling price are a combination of both our ancillary products and the sales price of the vehicle. So we were able to take $100 out. And from a procurement standpoint, we should be able to see more benefits here in the upcoming quarters as well. Aside from that, I guess it's sort of, you know, Vincent, if I'm you and I'm looking at this, the sales volume piece is a really tough question to answer in terms of, like, what does normal look like and how do we get back there? I don't think we've spoken as much on it, but, like, we've talked about performance managing locations. And to us, that's the restriction of capital when we see losses trending up. And we get really sensitive about around that because we want to get the best return on invested capital. And so we have, if I look back at fiscal year 24, we had a nine or 10% disconnect on sales from a year over year standpoint, Vicki, if I'm remembering correctly. A third of that was due to us performance managing locations and restricting capital. So, you know, call that, that's probably somewhere just north of 2000 units just from us performance managing locations. And so when you're looking at this sort of year over year comparison, it's both a combination of what we see in the marketplace and actions we're taking internally to restrict capital to our highest performing stores. And I think that's the best thing for our shareholders and for us. And then of course, if you layer in the fact that we've been more selective on the underwriting side, we've talked about that extensively, and that's gotta be a piece of it, right? There's certainly more customers we can take, but given the backdrop and the context of higher loan delinquency rates and default rates in the industry, we're trying to make sure that we take care of the customers that we do have and that that is sort of front and center. And I think there's some positive tailwinds, right? We made an upgrade to our CRM during the quarter, which should also aid in conversion. We're working on sales price, which should help overall sales volume. And then I touched on the addition of our head of underwriting last quarter. And so the underwriting team is working on ways we can grow sales volume, which look like you know, risk-based pricing, right? And so that would be another functionality of the LOS tool that we really haven't spoken about, but we expect to deploy that during the calendar year. And that would allow us to do a lot of things that allow us to go deeper in price loans differently if we needed to go deeper down the funnel or to go up funnel to keep more of our repeat customers who might be defecting and looking at other competitors. And so, you know, we're excited about the levers that we have in the business now.

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 that retail units as well.

That's super helpful detail. Thank you for that. So that 500 to 800 cost per vehicle, if you can take that out, that's 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. That part's 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 and 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 quote unquote back book, versus what you're underwriting to now in the 2024 and 2025 vintages, if you could maybe help us bifurcate what your expectations are for what you're 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 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. You know, if you look at our cash on cash returns table, I would point to, you know, the difference in our projected cash on cash returns there, you know, for the book of 23 going from 49% now to 64% in 24 and 72% in 25. And then as we mentioned, you know, 33% or so of the portfolio relates to that back book and that they're now 22 months aged so we're getting you know 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. It might have been a 200 grand 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 percent 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 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, Vicki, for the quarter, we were down over $2 million in the quarter just 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 You know, for us, I think, you know, that's probably a million dollars quarterly in terms of new expense that we're realizing. You know, 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 the 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. 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.

Those are all super helpful. Thanks very 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.

Yep. 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 Carver. Thank you.

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