Credit Acceptance - Q3 2023

Transcript

Operator (participant)

Good day, everyone, and welcome to the Credit Acceptance Corporation third quarter 2023 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 like to turn the call over to Credit Acceptance Chief Treasury Officer, Doug Busk.

Doug Busk (Chief Treasury Officer)

Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation third quarter 2023 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 that both contain 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 mention 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. Our GAAP and adjusted results for the quarter include: a decrease in forecasted collection rates that decreased forecasted net cash flows by $69 million, or 0.7%, compared to a decrease in forecasted collect rates during the third quarter of 2022, that decreased forecasted net cash flows by $87 million, or 0.9%.

Forecasted profitability for consumer loans assigned in 2020 through 2022, that was lower than our estimates as of September 30, 2022, due to a decline in forecasted collection rates since the third quarter of 2022, and slower forecast net cash flow timing during 2023, primarily as a result of a decrease in consumer loan prepayments to below average levels. Unit and dollar volumes grew 13% and 10.5%, respectively, as compared to the third quarter of 2022. The average balance of our loan portfolio on a GAAP and adjusted basis increased by 0.9% and 10.6%, respectively, as compared to the third quarter of 2022.

An increase in the initial spread on consumer loan assignments to 21.4%, compared to 20.2% on consumer loans assigned in the third quarter of 2022. An increase in our average cost of debt, which was primarily a result of higher interest rates on recently completed or extended secured financing and the repayment of older secured financings with lower interest rates. Adjusted net income decreased 22% from the third quarter of 2022 to $140 million. Adjusted earnings per share decreased 20% from the third quarter of 2022 to $10.70. At this time, Ken Booth, our Chief Executive Officer, Jay Martin, our Senior Vice President of Finance and Accounting, and I will take your questions.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one, one on your telephone and wait for your name to be announced. To withdraw your question, please press star one, one again, and please stand by while we compile our Q&A roster. One moment for our first question. Our first question comes from John Rowan of Janney Montgomery Scott.

John Rowan (Director of Equity Research)

Good afternoon.

Doug Busk (Chief Treasury Officer)

Hey, John.

John Rowan (Director of Equity Research)

So, you know, when I think back, you know, overall a long time frame and looking at the company and, you know, every cycle, you know, that we've seen, whether it was the Great Financial Crisis or COVID, it was roughly about three quarters of charges that you took to kind of rightsize the forecasted collections. And then, you know, obviously, and then after that, those forecast revisions went away. You know, we're at six quarters now in a row of forecasted collection revisions on the downside. Is there something different about this environment that makes it more difficult to, you know, get that number right? Is it, you know, still COVID reverberations? Is it CECL, or is it car prices?

I'm just trying to figure out, you know, why we're so much longer into this cycle, and we're still seeing these negative charges. Thank you.

Doug Busk (Chief Treasury Officer)

Yeah, it doesn't have anything to do with CECL. I mean, that's just accounting. In terms of, you know, estimating forecasted collection rates, you know, don't have a perfect reason for it as to why it's taken longer for the 2022 vintage, in particular, to, you know, settle in. You know, those loans were originated in a pretty unique time. It was very competitive in the industry. You had very elevated used car prices and, you know, we have, we have had the impact of inflation, which is something that we've never previously had to deal with. So, that's really about the best answer I can give you.

John Rowan (Director of Equity Research)

Okay. And then, you know, just obviously, I saw that the Q came out, and it doesn't seem like there's any material, you know, disclosures regarding the CFPB and New York AG suit, but it does say that there's an update that has to be given on November third. Is there anything you can tell us about what that update would include? Or is that, you know, a possible time frame in which this case would move forward again? Because obviously, it's still currently stayed. So I just want to understand what happens on November third. Thank you.

Doug Busk (Chief Treasury Officer)

Yeah. I don't think that, you know, anything's really going to happen with the case until, you know, the CFP or the Supreme Court rules on the constitutionality of the CFPB. The court has granted a motion to stay on our case pending that decision. So and I don't, I don't know exactly what will be discussed in early November with the court. But I, you know, the court has granted a motion to stay pending the Supreme Court's decision.

John Rowan (Director of Equity Research)

Okay. All right. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from John Hecht of Jefferies.

John Hecht (Managing Director)

Hey, hey, guys. Afternoon. Thanks for taking my question. I mean, I guess it's my question is a little bit related to John's prior question, you know, just because this is a longer cycle. You know, in prior cycles, you know, you guys have kind of emerged as a price maker, as other competitors have, you know, fallen back. But if you look at the spreads that you're issuing now, they're still kind of below where they were even a few years ago. I'm wondering kind of how would you describe the competitive market, and is there something that you'd see in the future or any indications that, you know, it may be becoming more favorable because we've gone through such a tough cycle for a period of time?

Doug Busk (Chief Treasury Officer)

Mm-hmm. You know, I think we think the competitive environment is relatively favorable today. You know, we grew the loan portfolio and we grew originations in Q3 at rates that we're happy with. Volume through the first 28 days of October is up materially. So I think the competitive environment is favorable. You know, the October volume would indicate that it's, you know, even more favorable recently. It's certainly not a situation like that that existed in the credit crisis when, you know, the industry really didn't have access to capital for a period of time. But I think that, you know, the competitive environment is certainly better than it was a year ago, and, you know, don't know how that's going to play out in the future, but we're pleased with how it's going to date.

John Hecht (Managing Director)

And then just, I guess, maybe comment on, you know, obviously, you're writing down the expected cash flows, and you've had kind of fits and spurts over the past few quarters in that. You know, maybe can you just discuss the credit environment? I mean, is it, is it a consumer that's just been exhausted by inflation? Or is it more tied to asset values in the market? How do you describe the credit and the consumer's ability to service their debts right now?

Doug Busk (Chief Treasury Officer)

Yeah. I mean, I think it's a combination of several factors, probably the two that you mentioned, asset values and inflation would be the, you know, two most material contributors.

John Hecht (Managing Director)

Okay. Thanks very much, guys.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment for our next question. Our next question comes from Robert Wildhack of Autonomous Research.

Robert Wildhack (Director and Equity Research Analyst)

Hi, guys. Just to follow up on the last point there. Why do you think the competitive... or what's the reason behind the improvement in the competitive landscape? Is that structural? In other words, competitors going out of business, or is that temporary, i.e., some just pulling back for a bit?

Doug Busk (Chief Treasury Officer)

You know, there have been some companies that have gone out of business or exited the market, but they haven't been huge participants in used vehicle financing to subprime consumers. So I think it's just more a function of other industry participants having to price their loans differently due to the increase in interest rates. I think people are also probably reacting to softness in credit performance.

Robert Wildhack (Director and Equity Research Analyst)

Okay. And then as it relates to the downward revisions in forecasted collections, have you adjusted your approval rate at all in the recent quarters? And then did you change your approval rate at all in October?

Doug Busk (Chief Treasury Officer)

We haven't seen a material... I mean, you know, we approve everyone. So we haven't seen a change in our approval policies. And, you know, we haven't made any meaningful changes in policy or price in October.

Robert Wildhack (Director and Equity Research Analyst)

Okay. No change in October?

Doug Busk (Chief Treasury Officer)

No material changes, no.

Robert Wildhack (Director and Equity Research Analyst)

Okay. Thanks.

Operator (participant)

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

Doug Busk (Chief Treasury Officer)

We would like to thank everyone for their support and for joining us on our 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.

Operator (participant)

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