Q3 2021 Credit Acceptance Corp Earnings Call
Okay.
Good day, everyone and welcome to the credit acceptance Corporation third quarter 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 Treasury Officer.
Sir you may begin.
Thank you good afternoon, and welcome to the credit acceptance Corporation third quarter 2021 earnings call.
As you read our news release posted on the Investor Relations section of our website at IR not credit acceptance dot com and as you listen to this conference call. Please recognize that both contain forward looking statements within the meaning of federal Securities law.
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 results for the quarter include.
Unit and dollar Euro dollar.
Volumes declined 29, 4% and 17, 9%, respectively compared to the third quarter of 2020.
An increase in forecasted collection rates for loans originated in 2018 through 2021.
This resulted in the $82 $3 million increase in the forecasted net cash flows from our loan portfolio.
Adjusted net income increased 31% from the third quarter of 2020 to $219 1 million.
Adjusted earnings per share increased 48% from the third quarter of 2020 to $13 84.
Stock repurchases of approximately one 3 million shares 8% of the shares outstanding at the beginning of the quarter.
At this time, Ken Booth, our Chief Executive Officer, Jay Martin, Our senior Vice President Finance, and accounting and I will take your questions.
Ladies and gentlemen, if you wanted to ask a question. Please press star one on your telephone keypad again Thats Star one.
So always keep that we will pause for just a moment to compile the Q&A roster.
Your first question comes from the line of David Scharf from JMP Securities. Your line is now open.
Hi, good afternoon, thanks for taking my questions.
Hey.
I guess first off.
Obviously, the entire industry is kind of struggling with the unique.
Inventory issues and elevated.
Used car values and affordability issues so.
Surprised on the volume front.
But I'm wondering if you could give a little color.
Perhaps on your take on the health of the independent dealer network and in particular is as we look at the decline in active dealers once again, obviously, reflecting.
Industry forces.
But is that decline entirely related to just.
The volume and affordability issues or.
Is there any attrition.
Attrition taking place among independent dealers that you are seeing right now.
I don't think that we have any real unique insight.
There.
Independent dealers.
Come into business and go out of business all the time.
<unk>.
I think the.
The best way to up.
Kind of understand what's happening from an attrition perspective would be to look at some industry data.
Problem with that is that that's available on a lagged basis.
So we'll be able to understand that better with the passage of time, but.
Right now I'm sure, it's a challenging time to be in it.
Independent dealer, but exactly how they are faring and what levels of attrition. There are I think it's difficult to say.
Got it.
Maybe just one follow up.
Once again this is maybe it's more of a qualitative.
<unk> without a crystal ball, but.
Obviously the.
Yeah.
Ryzen used car values certainly impacts your borrower probably the most.
And.
Just looking at the average loan size in this past quarter almost $27000 to about.
10% above what it was just in the first half of the year.
As you think about just the affordability aspects.
Your borrower.
Obviously stimulus wearing off.
There are areas of support.
Do you feel like we've kind of reached the ceiling, where it's going to be pretty difficult to put somebody in a vehicle.
Be able to be comfortable with their monthly payments.
Beyond this $27000 level or do you think there is room to go.
Okay.
I think it's.
Again tough to tell.
We certainly have.
Payment to income criteria that.
We use when we underwrite the loans.
Sure.
As the industry does.
As you point out certainly elevated used car prices have made it.
Increasingly challenging.
For our borrower.
I think it's fair to say that further increases in used car prices will make it incrementally more challenging but I think it's very difficult to say.
This is the limit I think it's fair to say.
The higher prices go and make some more incrementally challenging so I think there'll be some relief for our borrower of used car prices went the other way, it's fair to say that but I can't say I don't.
There is a cliff phenomenon that occurs got it got it no fair enough I mean, obviously a lot of unprecedented.
Vince we're all living through right now great well, thank you very much.
But.
Your next question comes from the line of marshy Orenburg from Credit Suisse. Your line is now open.
Great maybe just maybe to follow up on that.
I think you've kind of alluded to some of the steps you're taking.
To underwrite.
And a more higher used car price environment any other steps that youre, taking in terms of.
Thanks <expletive>.
That youre putting in place.
We haven't made material changes to our underwriting process.
Sure.
Okay. Okay.
I did notice that the yields kind of adjusted revenue I should say.
Sure.
Has gone up the last couple of quarters, and I think can be footnotes talks about that being a function or the.
Strong collections that 'twenty 'twenty, 4% does that span a number that we would expect to persist or is there.
Any way to put some.
Parameters around that.
And then I think it's hard to tell them, it's going to persist or not it really depends on how long elevated collections remain.
I mean, that's hard to predict how long that'll go on but.
Collections have been really strong for us as long as they continue.
We will see pretty high adjusted revenue.
Got it.
And.
Yes.
<unk> notes.
Dark options expense.
Is that going to be a regular quarterly amount is that.
Should we think about that 14.
14 secondly.
Yeah.
Think about that expense, we didn't begin recognizing that until we receive shareholder approval.
July So we received approval July of 'twenty one.
So if you look at that number that was about 70 days worth of expense for the third quarter.
You can.
Project that out and then that would be what it is for the fourth quarter.
One thing I would point out there.
Is that the first annual vesting assortment of these stock options. We granted them first back in last December is going to be compressed in this first annual period. Since we didn't begin expense recognition until we receive shareholder approval, where the future years that will be spread out more throughout the year.
And so.
Is that a calendar year. So you are saying Q3, and Q4 will be the announced that we would expect to see for the full year 'twenty two.
Okay.
I think.
It depends.
Because if you look at when the options were granted.
The majority of them are granted last December there was another large grant in April.
It won't exactly be that amount going forward.
Okay, we'll take it offline we'll figure it out.
The.
I did notice obviously very large repurchase amount in 'twenty.
In the quarter.
It looks like you bought back through October 25th based on that front.
Q, maybe another 200000 shares how do you how should we be thinking about the pace of repurchase.
Given.
Yes.
Given the volume look like in October.
How should we think about that.
And then I think we really just going to follow our standard approach to that when we have excess capital first we look to have an investment in the business.
<unk> got opportunities to invest in the business, that's what we do.
Right now, obviously with originations being challenging.
We've got adequate capital so at that point, we return it to shareholders.
Consider.
We expect that to continue for a while.
Gotcha.
Hey, Moshe.
Yes.
Relative to your question about stock option expense. There is a table on page 41 of the Q that shows the expected amount of expense for the remainder of the year and subsequent years.
Okay.
Okay got it thanks a lot.
You bet.
Your next question comes from the line of Ray Cheesman from <unk> Capital. Your line is now open.
Thank you for taking my questions I had two today.
Most of the big banks.
It did have an outstanding consumer exposure are also reporting terrific credit quality and.
Also they warned us that over the next two to four quarters do you expect things to more normalize with the.
Full off of various government support projects, where they're turning back on of other loans streams like student loans on February one.
As you kind of got checked 2022.
Would you expect anything different to happen in your business are basically the same kind of go back to the old rates.
And then.
We don't have a crystal ball, obviously, so you don't know what's going to happen.
Our collections have been very strong as you've seen in our last couple of releases.
Doesn't really seem logical that those will continue forever.
When they fall off I think it is harder to predict.
But I.
I would expect at some point collections to go back to more normal levels.
The other question I had was the shift in the portfolio towards increased dealer loans versus purchase loans do you feel like that changes the risk profile of the portfolio.
Yes, certainly I think it changes it to a degree because on the portfolio program, we're sharing the risk on the loan with the dealer so.
Any shortfall in collections is substantially offset by a reduction in dealer holdback.
The change in the percentage of the portfolio was relatively modest so there hasnt been a significant derisking of the portfolio but.
There was a.
A reduction on the margin.
And if I may just one more quickly.
You said that you hadn't changed your underwriting standards.
Wondering if you.
If the falloff in new assignments because look.
I'll be honest I'm looking for a car and they told me I have to fly to Texas to get one and I live in Colorado.
The question is do you guys ever play with and I shouldn't use that term.
Call It a technical term play valley.
Value.
In order to generate some volume you might adjust your pricing because of the support in the used car market too.
To kind of moderate that risk in the next one to three years.
We're always running various champion challengers that.
Try to maximize our economic profit originated so we do run various scenarios and we attempt to price it appropriately, but we're not we're not chasing volume for example, or we're not hedging.
Against something that you really can't predict the future.
Thank you.
Again to ask a question. Please press star one on your phone's keypad.
And that's Star then the number one on your phone's keypad.
Your next question comes from the line of Rob <unk>. Your line is now open.
Hi, guys.
And more.
Our strategic question, how do you think about the appropriate leverage level for running the business.
Yeah.
<unk>.
What we're trying to do with the way we finance the business is make sure. It produces a cost effective result from the capital markets are wide open but also.
It allows us to maintain.
Maintain.
Level amount of originations.
If the capital markets were closed for an extended period of time, so that is really driven.
We've run the liability side of the balance sheet operating with.
Modest leverage and significant excess availability on our revolver. So it's it's.
The output of an analysis that we do.
Okay, and then would you say the degree of leverage that you have today that would be characterized as modest.
All of those criteria you have significant excess availability.
Yes.
Okay.
Thanks.
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.
We'd 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 IR at credit acceptance Dot Com, we look forward to talking to you again next quarter. Thank you.
Once again this does conclude today's conference. We thank you for your participation you may now disconnect.
[music].
Yes.
Okay.
Okay.
Okay.
[music].
Okay.
Okay.
Got it.
No.
Okay.
Yes.
Okay.
Hum.
[music].
Okay.
[music].
[music].
Good day, everyone and welcome to the credit acceptance Corporation third quarter, two I did try to on 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 critical all sorts of credit acceptance Chief Treasury Officer.
But sir you may begin.
Thank you good afternoon, and welcome to the credit acceptance Corporation third quarter 2021 earnings call.
As you read our news release posted on the Investor Relations section of our website at IR not credit acceptance dot com and as you listen to this conference call. Please recognize that both contain forward looking statements within the meaning of federal Securities law.
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 results for the quarter include.
Your husband, all your ball down dollar volumes declined 29, 4% and 17, 9%, respectively compared to the third quarter of 2020.
An increase in forecasted collection rates for loans originated in 2018 through 2021.
This resulted in the $82 $3 million increase in the forecasted net cash flows from our loan portfolio.
Adjusted net income increased 31% from the third quarter of 2020 to $219 1 million.
Adjusted earnings per share increased 48% from the third quarter of 2020 to $13 84.
Stock repurchases of approximately one 3 million shares 8% of the shares outstanding at the beginning of the quarter.
At this time, Ken Booth, our Chief Executive Officer, Jay Martin, Our senior Vice President Finance, and accounting and I will take your questions.
Ladies and gentlemen, if you wanted to ask a question. Please press star one on your telephone keypad again, that's star one on your phone ski pad, we will pause for just a moment to compile the Q&A roster.
Your first question comes from the line of David Scharf from JMP Securities. Your line is now open.
Hi, good afternoon, thanks for taking my questions.
Hey.
I guess first off.
Obviously, the entire industry is kind of struggling with the unique.
Inventory issues and an elevated.
Used car values and affordability issues, so no surprise on the volume front.
But I'm wondering if you can give a little color.
Perhaps on your take on the health of the independent dealer network and in particular as we look at the decline in active dealers once again, obviously, reflecting.
Industry forces, but.
Is that decline entirely related to just.
The volume and affordability.
Issues or.
Is there any.
Tricia taking place among independent dealers that you are seeing right now.
I don't think that we have any real unique insight.
They're all.
Independent dealers.
<unk>.
Come into business and go out of business all the time.
<unk>.
The best way to.
I kind of understand what's happening from an attrition perspective would be to look at some.
Industry data the <unk>.
With that is that that's available on a lagged basis.
So we'll be able to understand that better with the passage of time, but.
Right now I'm sure, it's a challenging time to be.
An independent dealer, but exactly how they are faring and what levels of attrition. There are I think it's difficult to say.
Got it got it.
Maybe just one follow up.
Once again this is maybe it's more of a qualitative.
Question without a crystal ball, but.
Obviously the.
Ryzen used car values, you know certainly impacts your borrower probably the most.
And.
Just looking at the average loan size in this past quarter almost $27000 to about 10.
10% above what it was just in the first half of the year.
As you think about just the affordability aspects.
Your borrower.
And obviously stimulus wearing off in other areas of support.
Do you feel like we've kind of reached the ceiling, where it's going to be pretty difficult to put somebody in a vehicle.
Be able to be comfortable with their monthly payments.
Beyond this $27000 level or do you think theres room to go.
Okay.
I think it's.
Again tough to tell.
We certainly have.
Payment to income criteria that we use when we underwrite the loans.
Yeah.
As the industry does.
As you point out certainly elevated used car prices have made it in.
Increasingly challenging.
For our borrower.
It's fair to say that further increases in used car prices will make it incrementally more challenging, but I think it's very difficult to say.
This is the limit I think it's fair to say.
The higher prices go and make some more incrementally challenging so I think it is.
There'll be some relief for our borrower of used car prices went the other way, it's fair to say that but I can't say I don't think there is a cliff phenomenon that occurs got it got it no fair enough I mean, obviously a lot of unprecedented.
Events, we're all living through right now great well, thank you very much.
You bet.
Your next question comes from the line of Marci <unk>.
Credit Suisse. Your line is now open.
Great maybe just maybe to follow up on that.
I think you've kind of alluded to some of the steps you're taking.
<unk>.
To underwrite.
And aim for a higher used car price environment any other steps that youre, taking in terms of.
Thanks <expletive>.
That you are putting in place.
And we haven't made material changes to our underwriting process.
Yeah.
Okay. Okay.
And.
I did notice that the yields power adjusted revenue I should say.
It is.
Has gone up the last couple of quarters and I think couple quick notes talks about that being a function.
The.
This strong collections that 'twenty 'twenty, 4% does that is that a number that we would expect to persist as they are.
Any way to put some.
Parameters around that.
And then I think it's hard to tell if it is going to persist or not it really depends on how long elevated collections remain at.
I mean, that's hard to predict how long that will go on.
Collections have been really strong for us as long as they continue.
We will see pretty high adjusted revenue.
Got it.
The release notes stock options expense.
That is going to be a regular quarterly amount is that how should we think about that $14 7 million.
Yes.
Think about that expense, we didn't begin recognizing that until we receive shareholder approval.
In July so we received approval July of 'twenty one.
So if you look at that number that was about 70 days worth of expense for the third quarter.
You can.
Project that out that would be what it is for the fourth quarter.
One thing I would point out there.
Is that the first annual vesting assortment of these stock options, we granted them first back in last December.
Is going to be compressed in this first annual period since we didn't begin expense recognition until we receive shareholder approval what are the future years that'll be spread out more throughout the year.
And so.
Is that a calendar year. So you are saying Q3, and Q4 will be the announced that we would expect to see for the full year 'twenty two.
Okay.
I think.
It depends.
Because if you look at when the options were granted.
The majority of them are granted last December there was another large grant in April.
So it won't exactly be that amount going forward.
Okay, we'll take it offline we'll figure it out.
The.
I did notice obviously, a very large repurchase amount in 'twenty in the quarter.
It looks like you bought back through October 25th based on that front.
<unk> Q, maybe another 200000 shares how do you how should we be thinking about the pace of repurchase.
Given.
Given the volumes look like in October.
How should we think about that.
And then I think we really just going to follow our standard approach of that when we have excess capital first we look to have invested in the business.
That opportunity to invest in the business, that's what we do.
Right now, obviously the originations being challenging.
We've got adequate capital so at that point, we return it to shareholders. So I would consider.
We expect that to continue for a while.
Gotcha.
Hey, Moshe.
Yes.
Relative to your question about stock option expense. There is a table on page 41 of the Q that shows the expected amount of expense for the remainder of the year and subsequent years.
Okay haven't gotten there yet thanks a lot.
You bet.
Your next question comes from the line of Ray Cheesman from Anfield Capital. Your line is now open.
Thank you for taking my questions I had two today.
Most of the big banks.
It had an outstanding consumer exposure are also reporting terrific credit quality.
<unk>.
Also they warned us that over the next two to four quarters do you expect things to more normalize with the <unk>.
Falloff of various government support projects, where they're turning back on of other loan streams like student loans in February one.
As you kind of got checked 2022.
Would you expect anything different to happen in your business are basically the same kind of go back to the old rates.
And then.
We don't have a crystal ball, obviously, so you don't know what's going to happen.
Collections have been very strong as you've seen in our last couple of releases.
Doesn't really seem logical that those will continue forever when they fall off I think it's harder to predict.
But I would expect at some point collections to go back to more normal levels.
The other question I had was the shift in the portfolio towards increased dealer loans versus purchase loans do you feel like that changes the risk profile of the portfolio.
Yes, certainly I think it changes it to a degree because on the portfolio program, we're sharing the risk on the loan with the dealer.
Any shortfall in collections is substantially offset by a reduction in dealer holdback.
The change in the percentage of the portfolio was relatively modest so there hasnt been a significant derisking of the of the portfolio.
There is a.
A reduction on the margin.
And if I may just one more quickly.
You said that you hadn't changed your underwriting standards I am wondering if if the falloff in new assignments because.
I'll be honest im looking for a car and.
He told me I have to fly to Texas to get one and I live in Colorado.
The question is did you guys ever play with and I Shouldnt use that term, let's call. It a technical term play value.
<unk>.
In order to generate some volume you might adjust your pricing because of the support in the used car market to to kind of.
Moderate that risk in the next one to three years.
We're always running various champion challengers.
Try to maximize our economic profit originated so we do run various scenarios.
Temperature price it appropriately, but we're not.
Not chasing volume for example, or we're not hedging.
Again, something we really can't predict the future.
Thank you.
Okay.
Again to ask a question. Please press star one on your phone's keypad.
Dan That's star then the number one on your phone's keypad.
Your next question comes from the line of Rob <unk>. Your line is now open.
Hi, guys.
And more.
Our strategic question, how do you think about the appropriate leverage level for running the business.
Yeah.
<unk>.
What we're trying to do with the way we finance the business is make sure. It produces a cost effective result, when the capital markets are wide open but also.
<unk> allows us to maintain.
Level amount of originations.
Capital markets were closed for an extended period of time, so that is really driven.
The way we've run the liability side of the balance sheet operating with.
Modest leverage and significant excess availability on our revolver. So it's it's kind of an output of an analysis that we do.
Okay, and then would you say that the degree of leverage that you have today that would be characterized as modest.
All of those criteria you have significant excess availability.
Yes.
Okay.
Thanks.
With no further questions in the queue I would like to turn the conference back over to Mr. Busk for any.
Additional closing remarks.
We'd 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 IR at credit acceptance Dot Com, we look forward to talking to you again next quarter. Thank you.
Once again this does conclude today's conference. We thank you for your participation you may now disconnect.