Wake up, Buy Here, Pay Here people. It's a beautiful day. Go grab yourself another cup of Joe and say hello to Jim and Michelle Rhodes on the Buy Here, Pay Here morning show. Take it away, you two. good morning well you know I know the opening intro and the dialogue and all of that by heart even like the cadence and so I'm over here just mouthing it all and singing along with them and I mean it's just because it's fun and I'm over here trying to get spreadsheets ready and she's just being goofy it's usually the other way around or it's often the other way happy friday everybody welcome I'm glad to have you here. Beautiful morning in the backyard in Oklahoma. We are still here dealing with some family matters. looking forward to get back to Utah. And, uh, you know, we've got a lot of clothes back in Utah that I'm missing. I've got a neighbor here that said, so you just have your wardrobe that you brought with you. And it's like, yeah, I was only planning on staying here for a week. So we actually, when we originally came in early July, we were coming because my mother was not well. And so we just came long enough to, you know, see her through a, a, a situation with her health. And so it turned into something different, but anyway, We're happy to be here. The weather's beautiful today and happy to have you here for a Friday. Got some really important stuff to talk about. Yeah, we don't have any announcements. No, I do have one update. We had a V eight plus session yesterday around trade. So it was around internal trades. And this was a subject that as we often do with those V eight plus sessions, we ask our members if there are any subjects. And that came up in one of our meetings. And it was a, I noticed it was a thread and the BHP success group. Cause I was invited. I was tagged by one of the dealers that was in that session yesterday said, Hey, look, here's the same conversation we just had basically in our V eight plus session. And it was really interesting. We had some dealers there that are former bankers. And so they were able to kind of add the financial perspective to the whole conversation. And it's not too different than the conversation we're gonna have today. I mean, yesterday's was around when we trade a car, at the, we picked a twenty four month mark. I worked a lot with twenty four months in VA and we looked at the twenty four month mark. So what does it look like for the dealership when we do an internal trade a customer that's about twenty four months into their contract? In that example, what does it look like for their profit? What does it look like for their balance sheet? You know, their assets and really, really great, powerful conversation. Yeah, because you know, we, we teach that an awful lot, like you said. And, um, because what that does when you trade someone in after twenty four months, you know, a lot of dealers are going to like, that's a lot of work. That means I'm going to have to reach out. I'm going to have to start communication. And, and, and yes, there is more work involved. Um, there are a lot of options nowadays for how to reach out that don't require, um, you to hire more people. But, um, The, the idea that you can have them stay with a car for two years and they're happy with it, and then put them in a new car that they're going to be happy with for another two years. And then maybe put them in a new car that they're going to be happy with for two years. And, and that you keep, you keep trading them out into something that's newer because I mean, all of us are consumers and all of us here likely. have a different car in five years or less. Yeah, that's just what happens. I think that's what customers have an interest in doing. And sometimes the math doesn't work, right? And every dealer's got a different strategy and policy around us. But what we try to do is say, maybe we can put more information in front of you so that you can craft your policy you know, according to that. Yeah. And so hopefully we provide enough information to help dealers kind of shape, you know, how they want to do that. So let's just, the conversation is about, you know, the way you put it is. Today's conversation is about repos. Yeah. So, so yeah, shifting into our subject for today, it's like, we're looking at repos. We've been watching and we know that repo rates are up. We heard, In particular, Steve Carstens from Shilson Goldberg and Chung came out with their report some months ago that said twenty twenty four was the worst charge off month charge off period that they've seen. And I need to refer back to that. So I know exactly what they were calculating, but. You know, generally speaking, they said charge offs were the worst they've seen since they've been tracking it, since they've been doing that kind of annual report. And then we've seen charge off rates continue to run high in twenty twenty five. So you got to be careful when you talk about these kind of things, because there's all these different ways to measure. There's charge offs in severity, which is going to be the number of the dollars of accounts are going to be charge offs in frequency, which is the number. And so you just really need to be specific. We all need to challenge ourselves to be as specific as possible when we talk about numbers of this nature. And so for today, I've got a small pool, but the way I'm thinking about this is I went through our V eight members that have data back to January of twenty twenty four. So there's a fair number of those I extracted from those dealers who had kind of irregular things in their operation. They may have acquired contracts or sold contracts, which would affect, you know, a lot of the numbers. So I pulled those dealers out, but I ended up with a number enough dealers to be able to illustrate kind of what we're seeing. And the part I really wanted to examine is when charge offs are up in theory, if we're recovering repos and those, and those repos still have value, then in theory, our cash could increase. during that period of time. We know that there are dealers out there who have a practice of repossessing on a pretty short cycle because it actually boosts their cash. And while that's a whole different subject for a different day, today we're just looking at when we experience higher charge-offs, how is the fact that we're experiencing recovery showing up in our bank account? And so we can look at some numbers here. We can go into the The details, let me just show you before we look at numbers, everything you're going to see here today is based on a six month rolling average. So when you see June of twenty twenty four, that means the six month period ending June twenty twenty four. And we're working with averages here. So this is not. Not insignificant. It's something to think about. And I chose to look at a couple of different metrics. You want to go and share that, Michelle? Absolutely. And good morning, Stephen. Thank you for the comment. Yeah, Stephen, thanks for being here. Yeah. And we so if you can see the numbers well enough, I'll do what I can to expand it on my side or increase the the. Zoom in a little bit. Yeah, that looks better on your side. But the, what I chose to look at was first interest coverage. So let me remind those who, you know, haven't heard the podcast very often. We talk about this number from time to time, but interest coverage is a number that a lot of lenders would pay attention to. And we would say that most of us who have a finance company or even in the buy here, pay here, lease here, pay here business ought to watch this number. It is the amount of interest that we collect in a certain range relative to the net charge offs that we experience in that range so if you think about just generally speaking the reason buy here pay here lease your pay your dealers charge a higher effective interest rate is because they have a higher risk portfolio they anticipate higher losses and so that's why we charge the higher interest rate so this number is really just looking at, is our interest covering our losses? Okay, so this doesn't have anything to do with offering expenses. Because that is, again, I mean, looking at this from the outside as someone that's not, if the reason we have high interest rates are to cover our losses, then this is a really good reason to show why we have higher interest rates. Yes. So let's look at them one at a time here. So I just charted the same information and I'm just going to click one at a time and we can talk about, you know, again, it doesn't matter where these dealers are. What we're really looking at is their history. And, and even though this particular graph only brings in five dealers, That's still, if you're a single dealer in Middleville, Tennessee, you don't have much to compare to. So I'm offering you a look at five other dealers across an eighteen month period, looking at six months rolling average. So this is a trend across these dealers across this period of time. And I think as importantly is that it's less important what these dealers show is what your own numbers show and kind of how to calculate it, what methods we're using to arrive at this information. So the interest coverage, again, it shows this dealer here, you can see that they've had more volatility in theirs. Because again, when you're looking at a six month rolling average, you would expect these lines to be smoother. All of these are six month rolling average. So this dealer's got a little more volatility. They don't go below ever, but it is a lot more sporadic. So I'm glad you mentioned the below because I hadn't explained that, you know, ideally we want that number to cover. We want our interest to cover the net charge offs. And if it was, if we were above that, mark, then you're right. We would be above that zero line there. We would be in a positive range. So this dealer is positive, but they're a little more sporadic. Now this dealer, you can see their numbers are down. They're trending down, although we've seen an uptick in the last, you know, since April, that again, three month average or six month average, is, is trending up now, May and June. So hopefully that's an indication, at least for that dealer, that there's some positive, um, you know, movement. This dealer is showing pretty level, pretty level. They had, um, they're, they actually have been up in twenty twenty five versus twenty twenty four. I think you can see that they're, they're better than they have been. So yet another indication that some of these things may improving. And one of the other things that happened last evening, we had some people that we know that reached out to us about possibly investing in the subprime auto space. And so we were able to talk about some of the trends and some of the things that are happening. I think this is another indication kind of of what is happening in this, this world of, uh, buy here, pay here. This one is also pretty level. It looks like they've dropped below or just been, no, they've dropped a little bit. They've dropped below, but they're below, but you can see in twenty twenty five, I would say their numbers are higher. They're trending higher in twenty twenty five than where they were last year. And then here's another dealer that is also showing to be down you can see that's a pretty sharp drop off in terms of their charge off rates but again we're only really looking at twenty twenty four I wish and keep in mind our v eight data only really started in january of twenty twenty four so we don't have it would be nice to be able to see this same information dating back to the period prior because twenty twenty four is the period that charge-offs start to happen, but at least relative to the long-term range, but that's part of what we're trying to study here. Do you have questions? Well, I do, and I'm not sure if it's something that you're planning on going into, but what are the interest rates? Oh, yeah. I don't have that of each of these dealers. I didn't chart it here or have a reference, but most of them are in the low twenties. Okay. I don't know that we've got anybody. Yeah, just thinking through the list there. I don't know that we've got anybody in the twenty eight percent range. I do know. I don't know if this is reflective, but you've got some dealers that are like in seventeen. I don't know that any of those are represented here, but that will be a factor. I mean, everybody's got their different strategies and their business models and how they They choose different ACVs, cost of car. I mean, there are a lot of different factors here, but I think the things that we're trying to look at, and so let me look at, let me show you again. So a couple of numbers that we have here is total portfolio cash yield, but obviously when you have portfolio ranges for these dealers can be very incised. So what they actually yield, let's look at this dealer. Back in June of twenty twenty four, their yield of their entire portfolio is one sixty seven. Now they're up to two forty nine. So obviously some growth. Same for this deal or sixty seven up to one forty eight. Here's a dealer that's quite large. They were bringing in one point five total. This is when I say yield. I mean, all money's. generated by the portfolio. Not looking at down payments, just looking at money brought in by the portfolio. So principal collected, interest collected. This is after they've left the dealership kind of thing. Is that what you're talking about? No, this is all contracts in the portfolio. How much cash do we bring in on a monthly basis? Or in this case, a six month average basis. for all types of money that's generated by the portfolio, which is not down payment. What's generated by the portfolio would be principal and interest and then repo recoveries. I treat those as cash. So this is why for purpose of our study, the part I really want to look at, I've got a graph of it, so it'll make a lot more sense, but look at these numbers where we look at repo recovery as a percentage of the total amount of money brought in by the portfolio. So again, that total yield. And I just said, okay, what percentage of the money that we're bringing into the, operation is coming from repos. So let's look at this first dealer back in June of twenty twenty four. They were bringing in about twelve percent of their total money coming into the business was coming from repos. And that's going to be a cash value. Right. These are using a wholesale cash value. This is another area that's problematic in our industry that we just don't have consistency. These dealers have consistency. the ones that I charted have consistency in the way that they handle their repos. But this dealer's up to nineteen percent, right? Now, nineteen percent of the money that they bring into the business on a monthly basis based on the last six months of average coming from repos. So that shows you that they're up quite a bit. Let's pick another couple more. This dealer is flat ten point one and ten point one. Some of these are pretty stable. Here's one that's better. They were at seventeen percent back at the beginning and now they're down to about nine point one percent. So we hope that's an indication. This one, nineteen percent, still nineteen point six. Here's one that was started out at seven point one up to eleven point nine. So we can see this in a chart. Again, I've got it graphed and I'm only kind of taking out the dealers that are anomalous or have kind of unusual numbers. you can see that recovery as a percentage you know again I just felt like this was the most valid number we could choose because it's a better indication of how many how much is the repo recovery affecting the bank account okay how much of it's hitting it doesn't hit the bank deposit in the same way so like should probably explain that my my method here is to treat a repo as though it's cash. So if a dealer books in a repo and says it's value of wholesale, it's five thousand dollars. In this calculation, we treat that as cash. Why? Because the dealer is either going to liquidate that at the auction. We hope it brings five grand or they're going to put it back in their repo process or their inventory process, which is money they don't have to spend buying a thousand dollar car. So it's it's got a cash impact to the business. Some kind of just lost in there as part of why I wanted to. Take time to study this because it gets lost in there, especially if the dealers run the line of credit and they've got this money getting swept into a sweep account. And now it's getting adjusted and they get this waterfall settlement at the end of the week or whatever. It's just the money moves so much that it's harder for dealers to be able to get to some of this information and get a good sense of what's really happening in there. They're business. They can feel the charge-offs, obviously. But what we really want to look at here is, you know, this dealer is obviously their recovery as a percentage is up. This dealer recovery as a percentage clearly up, right? They're definitely showing more, you know, of the money that they're bringing in is in repos, not principal interest. All right. And so this dealer is slightly up, pretty flat. This dealer is up. in terms of what percentage of their money is coming from repos. And this dealer is definitely flat. That's probably an indication of their, their methodology. Just a curious, curious. I'll take that down. Oh yeah, absolutely. When we're looking at these numbers, I, what I'm seeing is that there's the potentiality of a lot of different factors at play. One is how good are they at collecting a repo? Are they getting the car back? The next is what condition those cars are coming back in. And then things like what we talked about before, what is the actual interest rate? And there's an awful lot to unpack on that one because just because you have a higher interest rate doesn't necessarily mean that you're going to do better on this because you can have a lower interest rate and you're collecting more in a shorter amount of time. So when the repo does happen, you have less that, that you, that you need to cover the lifespan. Um, so I'm just, I'm curious, it's, is that something that you have, you've, um, looked at about is what are their success in repos? Is it that they're having a higher success in actually retaining the cars back? Is it a combination? I mean, there are more repos. We've talked about that. They're across the board, across the industry. There are more repos happening. And so that success of actually being able to recover a car, how much does that affect this? I haven't studied. We don't have good information that breaks down what percentage of the times that they have a skip account where there is no repo recovery at all versus an actual car recovery. So all we're really looking at is the recovery amounts as reported by the dealer, right? And we validate that information from the software. We verify that the owners are, you know, tied to the software. But I think if I understand your question, we don't have We don't I don't have it here in terms of that. We do measure recovery as a percentage of gross charge off. So we would be able to go back and look at that. I didn't bring it for today and I haven't studied it. Yeah, I think that would be an interesting thing to look at. Yeah, we can look at that and try to bring the results back in the future. But I think that'll come up as we bring this conversation into our August V eight groups. You know, this is something that we will be. you know, we talking about these, this analysis and see what dealers conclude from this. But I think, you know, when you look at, if I go back to interest coverage for just a minute, you want to show that, you know, I think the thing that I would urge dealers to think about, and this is again, a small sample, but just look at the, look at the line right there where the zero is see that zero mark right there. And just look at what percentage of the dealers are above that line. I mean, you've got a few dealers that are dipping below that line recently, but most are still above that line. So I would say we get kind of nervous when the repos start to happen. We certainly subscribe to the thing that you've heard us talk about in the past that Ken Shilson said, others have echoed his remarks about we really should periodically go back and examine our charge-offs and look at our projections and say, if our charge-offs doubled, where would that put us from both so in our case we want to look at where does that put us from a profitability standpoint because that's a question with a lot of lenders now let's look at um our the impact on our cash flow and and all just totally operationally where does it put us does it sink us or not and so when you look at this this this would say people are you could go by social media and say charge officer up they're horrendous if you just listen to some of the social media threads you know am I going to be able to stay in business blah blah blah well This suggests that at least most of these dealers that are at least the members of our VA groups, most of these dealers are still running in the positive on their interest coverage. So their repo losses are not so severe that they're running underwater in interest coverage. So put that aside for a minute with most of these dealers and say, well, I don't have a lot. Even with my lender and covenants, I don't have a lot to be concerned about over there. So now you look at the cash flow and are my bank accounts improving because I've got more repos. Now I'm not having to spend as much buying cars. And look at the situation operationally speaking. We never want repos. That's not the outcome we're looking for, I hope, as a dealer. And so we hope to be able to recover or save the account, keep the customer paying and not end up winning a charge off. However, when we do have a charge off, we need to go the next step and study that and say, what has been the impact to us operationally? from a pure bank account standpoint and from an inventory management standpoint, what are the things that are kind of driving us operationally right now? And let's just look at that list. And, you know, it's my nature anyway, but I think sometimes we get a little bit too reactive. Yeah. Right. And so we look at these. So I think we need a broader study. We need to make sure that we look at the total thing in a more comprehensive way. so that we can make a better judgment about how it's really affecting us. And is it as adverse as we might think? It feels painful and it is painful in the moment to experience that repo and charge off. I think the bigger question for me today, and we don't have the answer. I think we all need to work together to find these answers about why are the charge offs high? You watch the news and read the paper and it says, I guess, are there still newspapers? I hear that people read the newspaper, but basically when you read the news and see the news, it suggests that, that, The economy is great. People are working. Everything indicates unemployment is down. You know, all of those kind of things. So we did. Yeah. It's interesting. Some some articles are talking about people are going more and more into debt. Right. And so I'm not sure how that how that plays into it. But. I mean, for the most part, unemployment is down. Yeah. It means people have jobs. People have jobs. And so why are we charged off stuff? Well, and consumer confidence is down, I think. According to the study that we were looking at recently. We had chat GPT sweep all the stuff because it can do research way faster than we can. And so we did a podcast a few weeks ago around that subject. And it basically suggested consumer confidence is down because Consumer spending is down. And that's across the board. All economic levels, they're not spending. And they're seeing that in a lot of different industries, not just the car industry. And even though our small data pool here suggests things are pretty flat to maybe even improving with the percentage of the dealers that we look at. calculated here. And by the time we get all of our data pulled together for the month of July, then we'll be able to come back with more follow-up information. But basically I just say, we want to make sure that we're prepared for, and we can do projections that tell us, you know, what does it look like if there's no end, if we have another six months, a year of this, what does that look like for us? And when can we be prepared for it? Let's be proactive about that and take some measures, take some steps now, to make sure that we can manage our way through a scenario like that. I'd heard that from Darla about the double and so she obviously got that from Ken. That is a long game. That's a long game approach to when you're stopping on a regular basis every month or whatever because it does, we fluctuate. and you're running that and you're looking at that, that's what someone that has a long game approach does with their businesses. They're looking, all right, if this happened, what would happen? We see frequently dealers that are in the game to just make a bank, speed themselves right off a cliff. I mean, it's just like, boom, boom, boom, boom. How do we make as much money as we possibly can? And it's just, there's like, buy, buy, buy, sell, sell, sell, buy, buy, buy, sell, sell, sell, without these kind of, you know, buffer or things that bring you back down to earth conversations because that's the long game. That's how you look at the long game as you're doing things like this on a regular basis. You're looking at, can my portfolio handle a downtick of this kind? And And that dealers that have been around for a long time and that have a long game, they don't change their business plan because things look rosy as much as, as you know, if you're not looking long-term, it's like business plan is working. We continue to, to, to work this way and make little minor tweaks, but. you know, it, it's this, this industry scene. And I, you know, I hear from experience you had as a dealer and talking with dealers across the board that this ebb and flow, whether it be from capital or repos or the, you know, consumer confidence or whatever, it ebbs and flows. It has, it's gone up and down with, and those dealers that have been around for a long time, know that and they are probably planning differently or looking at how their, their business model. Guess what? There will still be ebbs and flows in the future. There will be ups and downs. So I think one of the takeaways for me here is that if I'm, if I'm your lender, Michelle, and you're the dealer and you come to me and you say like, we're, we're going to have our quarterly set down or virtual meeting or however frequently that happens. But you come to me with a plan and you have what we used to call. I'm no data scientist, but I used to hear them refer to what you call a two vector sort of graph that says best case, worst case scenario. And so if if you can lead the conversation and show me that you have a plan and we're prepared for these eventualities. And we're we're we're managing our way to this and we're prepared for this because that to me says that you're you're on top of your business. You know, kind of where it could go and that and that you're prepared to manage your way through those scenarios. If I'm a lender, that's what I think. And when times are tough, I think that's what separates, you know, from. just being proactive and maybe even starting the conversation. I would love it if you were the dealer and you reached out to me and said, hey, can we schedule a meeting? We've had our management team meeting and we built the forecast and I would like to be able to share that with you. I think those conversations don't happen enough. this is what I would be urging dealers to do and and obviously when we think about how do we solve this how do we reduce the repos and charge off item one for us is always going to be engage engage engage make sure we're in communication with our customers and we know what's going on with them before they find themselves in that situation and so that we can have we can be better prepared And I always say, I said it to somebody yesterday, I did an interview for a guy who's doing a PhD study and it was really nice to spend some time with him and share a little bit about our industry. And one of the things we talked about is this idea that dealers in our business are It's a challenging business. It really can be a really difficult business. And one of the things that we have, one of the problems that we have in our business is that ours has complexities that others don't have. Just like what we're illustrating here today, the timing of profits and cash flow don't always coincide. And we have to make sure we're with a business partner, with an investor, with a lender who understands that piece of our business and uh and can kind of roll through those things with us but also just has the ability to uh to recognize that these these things that that happen we we have to be able to manage our way through it we can't be too reactive and we just need to make sure that we're positioned that's another question I didn't even think about bringing in is um like their percentage of repos because of that whole connecting to your consumer. Cause the, the, the end game is, is not really, can you cover, but is how many, how many accounts are you saving? How many accounts are you continuing to keep on the books? And that actually flows in that other, what, what you said you had to the VA plus meeting. of if you did a twelve, twenty four month trade in program that that takes that customer off of this repo, you know, unless it's a life situation. I mean, if it's mechanical, you're probably going to solve some of that. But I think the reality here is we're not going to know, you know, if there's something we can do to save the charge off, that's going to be communication. That's going to be dialogue. That's going to be keeping in touch with our customer and having our customer feel comfortable that they can talk to us about whatever the situation is. So it's true of communication between the dealer and the consumer. It's true of communication between the dealer and the lender. And so I think we, you know, it's one thing if the, If we're as a dealer playing a long game, but our lenders not, that becomes problematic, right? And so this is why we kind of have to make sure that we're, we're with investors and partners who are, you know, also playing a long game with us. But I would say this, this, to me, this little limited data pool to me suggests sky's not falling. We worked our way through some stuff. Most of these dealers charts are pretty flat to stable. And, um, and so there's some of them to show some positive uptick. So I think we, we, we need to move past opinions and, and, uh, and just make sure that we lean on data to decide what's really happening. Yeah. Hey everybody. It is Friday. Hope you guys have a great rest of your day. Thanks so much for joining us today. We know that you've got a lot of options to spend your time. So we're really grateful when, um, and you know, keep, keep coming with ideas for things that you'd like to have us talk about. Um, just reach out to Jim at white hat way.com. And if you need any help, That's another great way of reaching to us as well. So have a great day. Thanks again. Enjoy your Friday.
