Credit Acceptance - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered solid GAAP results with revenue $571.1M (+12.4% YoY), GAAP net income $106.3M (+65.3% YoY), and GAAP diluted EPS $8.66 (+70.5% YoY) as smaller forecast revisions and lower provisions aided profitability.
• Adjusted EPS of $9.35 was a modest miss versus S&P Global consensus $9.67; GAAP revenue modestly beat consensus $567.2M. Prior quarter (Q4 2024) was a meaningful beat on adjusted EPS ($10.17 vs $7.93) and a slight beat on revenue ($565.9M vs $564.7M)*.
• Forecasted net cash flows declined only 0.2% ($20.9M) — the smallest decline in the last five quarters — with vintages 2020 improving and 2022/2024/2025 modestly underperforming; slowing prepayments continue to weigh on timing.
• Originations slowed: unit volume -10.1% and dollar volume -15.5% YoY; mix shifted slightly toward purchased loans; management cited scorecard changes (lower advance rates) and competition as drivers.
• Capital and liquidity strengthened via $500M 2030 notes (redeemed 2026s) and a $400M ABS; unrestricted cash plus revolvers exceeded $2.2B at quarter-end, supporting buybacks (329k shares) and growth.

What Went Well and What Went Wrong

What Went Well

• Stabilizing portfolio performance: forecasted net cash flows decreased only 0.2% ($20.9M), the smallest decline in eight quarters; CEO highlighted collections improved sequentially except in 2022/2024/2025 vintages.
• Record loan portfolio and strong liquidity: adjusted loans receivable reached $9.06B; unrestricted cash plus available revolvers >$2.2B, enabling flexibility and buybacks.
• Financing actions de-risked the balance sheet: issued $500M 6.625% senior notes due 2030 and completed a $400M ABS at ~5.6% cost, supporting funding and liquidity.

Management quote: “Overall, forecasted net cash flows declined by 0.2% or $21 million, which was our smallest decline of the last 8 quarters.” — CEO Ken Booth.

What Went Wrong

• Originations decelerated: unit volume -10.1% and dollar volume -15.5% YoY; average advances fell, reflecting smaller loan sizes and lower advance rates; market share slipped to ~5.2% for first two months vs 6% LY.
• Adjusted return on capital declined to 9.2% (from 10.1% YoY and 9.8% QoQ), driven by slower cash flow timing (lower prepayments) and higher operating expenses (seasonal payroll/fringe benefits).
• 2022 vintage still underperforming initial forecasts; macro volatility (inflation/tariff risk/recession) could challenge forecast accuracy further, per management.

Transcript

Speaker 4

Good day, everyone, and welcome to the Credit Acceptance Corporation first quarter 2025 earnings call. Today's call is being recorded. A webcast and transcript of today's earnings call will be made available on Credit Acceptance's website. At this time, I would now like to turn the call over to Credit Acceptance Chief Financial Officer, Jay Martin.

Speaker 1

Thank you. Good afternoon and welcome to the Credit Acceptance Corporation first quarter 2025 earnings call. As you read our news release posted on the investor relations section of our website at ir.creditacceptance.com, and as you listen to this conference call, please recognize the post contained forward-looking statements within the meaning of federal securities law. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in the cautionary statement regarding forward-looking information included in the news release. Consider all forward-looking statements in light of those and other risks and uncertainties.

Additionally, I should say that to comply with the SEC's Regulation G, please refer to the financial results section of our news release, which provides tables showing how non-GAAP measures reconcile to GAAP measures. At this time, I will turn the call over to our Chief Executive Officer, Ken Booth, to discuss our first quarter results.

Speaker 5

Thanks, Jay. Overall, we had another mixed quarter as it related to collections and originations, two key drivers of our business. Collections improved sequentially this quarter, with only our 2022, 2024, and 2025 vintages modestly underperforming our expectations, while our other vintages were stable during the quarter. Overall, forecasted net cash flows declined by 0.2%, or $21 million, which was our smallest decline of the last eight quarters. During the quarter, our loan portfolio reached a new record high of $9.1 billion on an adjusted basis, up 10% from Q1 last year, although we experienced a decline in unit and dollar volume growth. Our market share in our core segment of used vehicles financed by subprime consumers was 5.2% for the first two months of the year, compared to 6% for the same period in 2024.

Our unit volume was likely impacted by our Q3 2024 scorecard change that has resulted in lower advance rates and increased competition. Beyond these two key drivers, we continued making progress during the quarter towards our mission of maximizing intrinsic value and positively changing the lives of our five key constituents: dealers, consumers, team members, investors, and the communities we operate in. We do this by providing a valuable product that enables dealers to sell vehicles to consumers regardless of their credit history. This allows dealers to make incremental sales to roughly 55% of adults with other-than-prime credit. For these adults, it enables them to obtain a vehicle to get to their jobs, take their kids to school, etc. It also gives them the opportunity to improve or build their credit. Our customers are people like Vivian from Maryland.

Vivian is an elementary school assistant, a role that requires her to consistently and timely show up for children with disabilities and special needs. After her vehicle was totaled in an accident, she was left without reliable transportation. She needed a new vehicle but worried about her ability to secure financing due to her poor credit history. Her fears were confirmed when she was turned down for financing multiple times. Discouraged but not defeated, she found a dealership who approved her to finance a vehicle through Credit Acceptance. Vivian described the moment she was approved for financing as a turning point in her life. With a reliable vehicle, she regained her independence. Vivian plans to use Credit Acceptance again when it comes time to finance another vehicle, knowing she would be supported by a team that listens and puts her at ease.

During the quarter, we financed over 100,000 contracts for our dealers and consumers. We collected $1.4 billion overall and paid $68 million in dealer holdback and accelerated dealer holdback to our dealers. We enrolled 1,617 dealers and now have our second-highest quarterly number of active dealers with 10,789 dealers. From an initiative perspective, we've made progress with our go-to-market approach with the goal of supporting our dealers faster and more effectively than ever before. This requires teamwork, attention to detail, and an iterative process that attempts to make improvement every step of the way. We also continue to invest in our technology team and remain focused on modernizing both our key technology architecture and how our teams work to support this goal.

During the quarter, we were named the Top Workplace USA Award winner for the fifth year in a row with a number two ranking among companies of our size. Last year, we were recognized with the record 13 Workplace Awards, and we continue to focus on making our amazing workplace even better. We support our team members in making a difference to what makes a difference to them, raising money for five different charitable organizations that are selected by our team members. Now, Jay Martin and I will take your questions along with Doug Busk, our Chief Treasury Officer, Jay Brinkley, our Senior Vice President and Treasurer, and Jeff Suter, our Vice President and Assistant Treasurer.

Speaker 4

Thank you. 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. Our first question comes from Moshi Orenbuck with TD Cowen. You may proceed.

Speaker 7

Great. Thanks. I was sort of hoping that we could talk a little bit about these forecast changes. As you mentioned, this was the smallest one in a while, yet you still had a $76 million portion of your GAAP provision related to it. Unlike last quarter, when you had a larger forecast change, you had an increase in the adjusted yield, and this quarter it went down. Maybe could you talk about how we should be thinking about those two items, both in this quarter and going forward?

Speaker 1

Sure. First, I'll talk about your provision question, the $76 million provision for forecast changes. What that is, is the impact of us decreasing the present value of future cash flows. That has two components. There is the change in undiscounted cash flows, which is the $21 million decrease that you referenced. There is also the slower cash flow timing on our total forecast of net cash flows, which is approximately $2 billion. It does not take much of a slowing on the $2 billion of the cash flows to increase that provision. That is what drove the provision for forecast changes for the quarter. Now, on your point on the adjusted yield, there are a couple of things going on there.

If you look at page 10 of our earnings release, you'll notice we added a new metric there, which is adjusted finance charges as a percentage of our adjusted loans receivable. What you'll see there is similar to last quarter. We did see an increase in the yield from the prior quarter, and that's due to the yields on the current quarter origination. The expected yields on those new originations more than offsetting the decline due to the underperformance of the loans on the entire portfolio. We did see the adjusted yield increase slightly from Q4. What you're seeing as adjusted revenue is a percentage of adjusted capital. That did decrease from 18.4% last quarter to 18% this quarter. What was driving that decrease there where adjusted yield went up was due to the $500 million of cash-to-cash equivalents we have on our balance sheet.

It's higher than what we normally have just due to the timing of some recent debt issuances, coupled with slower loan growth. We don't expect to have cash or cash equivalents at that level, but that drove our adjusted capital growing faster than adjusted loans.

Speaker 7

Got it. Just to clarify on the GAAP provision, I guess that means the cash flows were slowing somewhat in addition to the $21 million less in just nominal amounts, right?

Speaker 1

That's correct. These continuous repayments come in lower than historical levels, or at least lower than what our forecast is expecting. We have continued to see a slight decline there in the timing or slowing in the timing.

Speaker 7

Yeah. In the opening comments, you talked a little bit about the volume. I noticed that you also had a slightly higher percentage both of purchased loans as opposed to portfolio loans. I mean, I guess that would sort of, I mean, I guess I'm not sure exactly what to make of that. Maybe you could kind of expand on that a little bit. I mean, it feels like, again, maybe at the dealer, more competition at the dealer. Is that what that would reflect?

Speaker 1

I think it's pretty comparable. I think it's a modest change. It was less than 2 percentage points difference. I would say it's just a little more randomness or mix of loans. I don't necessarily think it means due to competition or anything necessarily.

Speaker 7

Okay. All right. Thanks very much.

Speaker 4

Thank you. Our next question comes from Robert Wildhack with Autonomous Research. You may proceed.

Speaker 0

In the past, you've talked a decent amount about how forecasting models can be less accurate in periods of volatility. I think we could all agree that the broader environment today looks to be a volatile one. I guess, should we expect more volatility around forecasted collections going forward? How are you thinking about the accuracy of forecasts moving through 2025, given all the volatility in the broader market today?

Speaker 1

Yeah. Our current forecast right now represents our best estimate of how our loans are going to perform. We know predicting loan performance is difficult and can't predict the future any better than anyone else. We feel like we have a pretty good track record. There are a few things that could make it more challenging going forward. First would be the impact of inflation. It's declined some recently, but things still cost a lot more than they did three years ago. We don't know what the impact of tariffs could have on inflation. That's likely to increase inflation. We also know that vehicle prices could decline, but that risk does seem like it's minimized by the impact of tariffs. Thirdly, a potential recession. All that can have a negative impact on prices. We'll just have to wait and see.

What we have out there now is our best estimate based on what we know today.

Speaker 0

Okay. And then kind of on a similar point, the 2022 vintage and performance there was marked by a period of elevated inflation, whether it's the 2024, 2025, or even 2026 vintages. Those are likely to be defined by tariffs and maybe a recession. Is the source of the volatility a big deal, or is all volatility the same? Is inflation different, inflation-induced volatility different from a tariff-related volatility?

Speaker 1

It's tough to say exactly. It all has an impact because of the impact of inflation. Things like vehicle prices have less of an impact on our forecasted collection rate. We just really don't know at this point because what we have out there is our best estimates on what we know today. We also know the 2022 loans. Beyond just inflation, there are some other factors on why those have underperformed. A couple of those would be that the loans were originated in a very competitive period. It's generally here's purchased loan performance, consumers purchased vehicle at peak valuations, vehicle prices subsequently declined, and, as you mentioned, inflation. We also know what we saw in the 2022 loans, not unusual compared to what we see elsewhere in the industry.

Speaker 0

Okay.

Speaker 6

Just to jump in there too, that's the reason we can't predict when the volatility is going to come or what's going to be more volatile. That's why we price our loans with a big margin of safety so that they'll most likely still produce a good result regardless of those economic factors.

Speaker 0

Got it. Just quick, you touched on the cash, and I'm hearing you that this quarter was impacted by the recent debt issuance. More broadly, you used to run with a single-digit million cash number, and it's been up in the hundreds for the last three quarters. Why the longer-term increase there?

Speaker 6

I mean, hey, this is Jay Brinkley. Similar to what we said last quarter, we took a fairly conservative stance going into Q4 with the unknowns related to the election and what impact it would have on the capital markets. Really, we saw no reason to change that stance. There is a lot up in the air, obviously. We were pretty active during the quarter, as you saw. We refied our '26 notes and upsized those by $100 million. We also closed a securitization at the end of the quarter. I think in terms of timing, we feel pretty good about getting in and out of the market when we did. Things have gotten fairly volatile out there, and it feels good to be in the cash position that we are right now rather than having to issue into a volatile capital market environment.

Speaker 0

Okay. Thank you.

Speaker 4

Thank you. As a reminder, to ask a question, please press star 11 on your telephone. Our next question comes from John Rowan with Jefferies. You may proceed.

Speaker 3

Good afternoon. Just curious, why did you guys decide to accelerate dealer holdback?

Speaker 5

This is Doug. I can handle this. What we're trying to do with dealer holdback in general is incentivize dealer behavior, primarily at the time of origination, because part of their compensation is dealer holdback that is based over time on the performance of the loan. The problem you have with that is you're trying to incentivize dealer behavior today with additional profitability that will occur 30, 36, 42 months from the point of origination. We accelerated dealer holdback, and we've been doing this for many, many years to try to create a better linkage between dealer behavior at origination and that collection-related profit or dealer holdback.

Speaker 3

Okay. I guess just one accounting question. There's a pretty big jump in salaries and wages. Is that a good run rate going forward?

Speaker 1

Are you comparing salaries and wages to Q4 of last year or Q1 of last year?

Speaker 3

I'm just looking at the $88.6 million reported.

Speaker 1

Yeah. I would say there's some seasonal events in Q1 that tend to have operating expenses higher. It has to do with our payroll taxes, volume that's seasonally higher, low unit volume seasonally higher in Q1, which impacts sales commissions. We also have some higher fringe benefits in Q1.

Speaker 3

Okay.

Speaker 1

If you look at Q1 versus last year, you will see we gained some operating leverage that's declined in some percentage of average capital.

Speaker 3

Okay. You mentioned something earlier. I just want to make sure I heard it correctly. You said you had a 5.2% market share versus 6% last year. What timeframe was that? You talked about something about a vantage score. Just can you kind of repeat what you said so I have it?

Speaker 1

The 5.2% was for the first two months of the year because we do not have data for March yet. The 6% for 2024 was also the same period.

Speaker 3

Okay.

Speaker 1

What was the second part of your question again?

Speaker 3

You mentioned something about vantage scores being the reason for that. Can you just go over that again?

Speaker 1

I think, and maybe I didn't speak clearly or maybe you heard it wrong, but what I said was our unit volume was likely impacted by our Q3 2024 scorecard change that resulted in lower advance rates and also increased competition.

Speaker 3

Okay. All right. Thank you very much.

Speaker 4

Thank you. Our next question comes from Jordan Hymowitz with Philadelphia Financial. You may proceed.

Speaker 2

Thanks, guys. A couple of questions. One is, the CFPB recently dropped its lawsuit against you guys. Can you give a sense of how much of legal fees were spent in the first quarter on that case that won't be repeated?

Speaker 1

No. We don't comment on legal costs unless they're material to our financials. We won't comment on that, what we've disclosed in our filings. What I would do, though, is just reiterate what we put in a release last week, that we're pleased with the CFPB's decision to withdraw from the case as it should limit the scope to New York consumers only. As we've outlined in our motion to dismiss, this lawsuit seeks to create new law for litigation and certain legal theories that conflict with established statutes. We won't comment on legal reserves or legal expenses.

Speaker 2

Whatever it would be, that would be coming down. My next question is, you're getting closer and closer to not providing or writing down older pools, and you spent $76.3 million in the quarter. If I just tax-affect that number, it's about $5.5. Would I think about your earnings power being closer to $13.5-$14 today if there were no changes for right-backs to older pools?

Speaker 1

We think the best way to look at our financial results is looking at our adjusted financial results. I would use that as your proxy.

Speaker 2

Okay. Were there any other one-time things that you're not going to break out the legal fees? You've been spending a lot on IT and other things that may come down going forward?

Speaker 1

I mean, we have had elevated levels of investment to business in recent years. A lot of these have been foundational, trying to get things like sufficient talent density, changing org design, modernizing our tech stack. I think maybe at some point they would come down, but once we kind of modernize our tech stack, we're then looking at making a lot of changes and trying to improve our product. I don't foresee in the relatively near future the elevated levels coming down, although I will say we hope to start to see more of a return on them once we get past the foundational stage.

Speaker 2

Okay. Thank you.

Speaker 4

Thank you. With no further questions in the queue, I would like to turn the conference back over to Mr. Martin for any additional or closing remarks.

Speaker 1

We'd like to thank everyone for their support and for joining us on the conference call today. If you have any additional follow-up questions, please direct them to our investor relations mailbox at [email protected]. We look forward to talking to you again next quarter. Thank you.

Speaker 4

Thank you. Once again, this does conclude today's conference. We thank you for your participation.