Credit Acceptance - Q4 2023

Transcript

Operator (participant)

Good day, everyone, and welcome to the Credit Acceptance Corporation Fourth 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 website. At this time, I would like to turn the call over to Credit Acceptance Chief Financial Officer, Jay Martin.

Jay Martin (CFO)

Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation Fourth 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 laws. 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. At this time, I will turn the call over to our Chief Executive Officer, Ken Booth, to discuss our fourth quarter results.

Ken Booth (CEO)

Thanks, Jay. Our GAAP and adjusted results for the quarter include adjusted net income of $129 million, which is a 17% decrease from the fourth quarter of 2022. Adjusted earnings per share of $10.06, which is a 14% decrease from the fourth quarter of 2022. In terms of collections, we had a decrease in forecasted collection rates. That decreased forecasted net cash flows for our loan portfolio by $57 million or 0.6%, compared to a decrease in forecasted collection rates during the fourth quarter of 2022. That decreased forecasted net cash flows from our loan portfolio by $41 million, or 0.5%. We also had forecasted profitability for consumer loans assigned in 2020 through 2022.

That was lower than our estimates at December 31, 2022, due to a decline in forecasted collection rates since the fourth quarter of 2022. Also, we have slower forecasts of net cash flow timing during 2023, primarily as a result of a decrease in consumer loan payments, prepayments to below historical average levels. From a growth standpoint, unit and dollar volumes grew 26.7% and 21.3%, respectively, as compared to the fourth quarter of 2022. The average balance of our loan portfolio is now the largest it has ever been. On a GAAP and adjusted basis, it increased by 9% and 13%, respectively, as compared to the fourth quarter of 2022.

Our results also included an increase in the initial spread on consumer loan assignments to 21.7%, compared to 20.9% on consumer loans assigned in the fourth quarter of 2022, and an increase in our average cost of debt, which was primarily due to higher interest rates on recently completed or extended secured financings and the repayment of older secured financings with lower interest rates. At this time, Doug Busk, our Chief Treasury Officer, Jay Martin, and I will take your questions.

Operator (participant)

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star one one on your telephone. Again, to ask a question, please press star one one. One moment for our first question. Our first question comes from the line of Moshe Orenbuch of TD Cowen. Your line is open.

Moshe Orenbuch (Managing Director and Senior Equity Research Analyst)

Great, thanks. Gentlemen, if you could just talk a little bit about the competitive environment and kind of how you see it at this stage, you know, you know, reflected in the spreads that, you know, that you're seeing. Thank you.

Ken Booth (CEO)

So we feel pretty good about the competitive environment. You know, Volume per dealer is a good metric to reflect the intensity of the environment. You know, it increased, despite the increase in new dealer enrollments. You know, new dealers are generally less productive than seasoned dealers. And then, obviously, just our overall growth rate was very high for the quarter, and for the 30 days subsequent to year-end.

Moshe Orenbuch (Managing Director and Senior Equity Research Analyst)

Yeah, I didn't see the January. Were the January numbers in the release for volumes?

Ken Booth (CEO)

Yes. Yes, it was, 21.5% for the first 30 days.

Moshe Orenbuch (Managing Director and Senior Equity Research Analyst)

Thank you. At the same time, interest rates have been up a lot, and could you talk a little bit about, you know, how the financings you did during Q4 are going to impact interest expense? Is there a way to relate that to the, you know, the amount of spread that you need to pick up, you know, to offset that?

Jay Martin (CFO)

I mean, you know, the interest rate in Q4 was 6.3%, you know, versus 5.8% in Q3. That obviously doesn't include a full quarter of the $600 million Senior Note issuance. So all things equal, I would expect that number would be even higher going forward. What we try to do when we price our loans is maximize the amount of economic profit. That's economic profit per loan-

... times the number of loans. And in doing that, we consider the anticipated expenses we're going to incur over the life of the loan, including interest, sales and marketing, G&A, and salaries and wages. So as interest or other expenses go up, we either need to be satisfied with the lower return or reduce our advance rate relative to the anticipated net cash flows.

Moshe Orenbuch (Managing Director and Senior Equity Research Analyst)

Got it. And you did note that there was, you know, another kind of write down for forecast changes in, you know, in the quarter. Can you, can you talk a little bit about, you know, how that will affect, you know, the year—the adjusted yield, as we go forward?

Jay Martin (CFO)

Mm-hmm. I mean, the Adjusted Yield declined to 17.9% in Q4 from 18.5% in Q3. You know, what happens in Q1 will be dependent on the yield on new loan originations and loan performance in Q1. But all else equal, if nothing else changed, you would expect a decline in forecasted net cash flows in Q4 to put a bit of further pressure on the Adjusted Yield in Q1. But again, that makes some big assumptions about all else equal.

Moshe Orenbuch (Managing Director and Senior Equity Research Analyst)

Got you. Thanks. And then just last one for me is, you know, fourth quarter, we don't get the 10-Q, so it looks like you bought back 44,000 shares. Is that math correct? Like, is that the right amount?

Jay Martin (CFO)

I mean, I think we bought approximately 100,000 shares back, a little over 100,000.

Moshe Orenbuch (Managing Director and Senior Equity Research Analyst)

Got you. Okay, thanks very much.

Operator (participant)

Mm-hmm. Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star one one on your telephone. Again, to ask a question, please press star one one. One moment, please. Our next question comes from the line of Robert Wildhack of Autonomous Research. Your line is open.

Robert Wildhack (Director and Equity Research Analyst)

Hey, guys. A question on the forecast and collections and adjusted yield as well. First, what's behind the continued drop in forecasted collections? Is there anything specific that you'd highlight there? And then do you have any insight or thoughts on when that could ultimately bottom?

Doug Busk (Chief Treasury Officer)

I mean, I think it's... The reason for the loan performance being worse than initially expected is a combination of things, including the fact that those loans were originated in a very competitive period, which hurts loan performance. Those consumers financed vehicles at relatively peak valuations. I think the impact of inflation on the consumer has also contributed. It's impossible to say when, you know, loan performance will level out. If I look at the 2015 book of business, you know, it leveled out after this point. I mean, it's still declined, but at a slower rate. Whether that pattern will hold true on the 2022 business remains to be seen. But, you know, absolutely, at some point it'll level out. It's just difficult to say precisely when.

Robert Wildhack (Director and Equity Research Analyst)

Okay. And then could you speak to, you know, the current leverage level and your capacity to both continue or to continue buying back shares and also continue growing at, you know, this, this current pace? Thanks.

Doug Busk (Chief Treasury Officer)

Our leverage on an adjusted basis is within the historical range. So we're very comfortable with where we are today. Obviously, our GAAP leverage is different. And, you know, it's an apples to oranges comparison of pretty 2020 to today's leverage. But on a consistently applied basis, our leverage is within the historical norm. The way we think about buybacks is our first priority is always to make sure that we have the capital that we need to fund the anticipated levels of loan originations. So you know, what that means is we're growing faster, all else equally, we buy back less stock. That doesn't mean we don't buy any, but it means we buy back less.

Robert Wildhack (Director and Equity Research Analyst)

Okay, thanks, Doug.

Operator (participant)

Thank you. One moment, please. Our next question comes from the line of Vincent Caintic of Stephens. Your line is open.

Vincent Caintic (Managing Director and Specialty and Consumer Finance Analyst)

Hi, good afternoon. Thanks for taking my questions. First one, so you highlighted that the average loan balance as high as it's been, and the loan terms have also been increasing. Just wondering, if you're kind of comfortable with those ranges, can you take them higher? And if there are any other adjustments that you are thinking about when you think about underwriting? Thank you.

Jay Martin (CFO)

I mean, the consumer loan balance was, you know, pretty flat on a year-over-year basis. Loan term was up a month. So I don't think there's been, you know, a dramatic change over the last couple of years.

Vincent Caintic (Managing Director and Specialty and Consumer Finance Analyst)

... Okay. Thank you for that. And then on for the forecasted collections, I'm wondering if there's any macro assumptions that are baked into there. The, I guess, for instance, the Manheim Index with used car sales and used car prices or Fed rate cuts or anything like that. I don't know if that has any influence on your on forecasted collections, if you could talk about that.

Jay Martin (CFO)

We don't include macro variables like unemployment rates or inflation rates or GDP or anything like that. You know, we do have a, you know, a depreciation curve that we end up using, you know, to model, you know, forecasted collection rates. So that's factored in. But no one really knows what is going to happen to used vehicle prices over a 60-month loan term. So the way that we deal with uncertainty associated with used car prices and all the other uncertainties is just by building a pretty significant margin of safety into our loan pricing when they're originated. We do that, so even if loan performance is worse than expected, our loans are still likely to produce satisfactory levels of profitability.

Vincent Caintic (Managing Director and Specialty and Consumer Finance Analyst)

Okay, thank you. And last one from me. So I understand you forecast collections and maybe you change underwriting or change some variables to get to your desired results. But when you think about the consumer that you're lending to, just if you can, if you have any views about how that consumer health is doing, are trends getting better as you're over the past couple of quarters? Thank you.

Jay Martin (CFO)

It's pretty early to say. Thus far, the 2023 loans are performing better at the same age than the 2022 loans were. But again, that book of business, you know, really isn't all that seasoned. We have made adjustments, you know, as we've seen the underperformance in the 2021 and 2022 loans. We've incorporated, you know, we're always making changes to our forecast based on recent trends in loan performance, so we have made adjustments to our forecast there. But I think it's too, too early to have a conclusive comment on consumer health.

Vincent Caintic (Managing Director and Specialty and Consumer Finance Analyst)

Okay, cool.

Operator (participant)

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

Jay Martin (CFO)

We would 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.

Operator (participant)

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