Q4 2021 Credit Acceptance Corp Earnings Call
Speaker 1: Oh.
Yeah.
Good day, everyone and welcome to the credit acceptance Corporation fourth quarter 2021 earnings Conference call.
Speaker 2: Today everyone and welcome to the Credit Acceptance Corporation, Board Quarters 2021, Erning Scotland School.
Speaker 2: 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 will be given the call over to Credit acceptance sheet treasure officer.
Today's call is being recorded.
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 Douglas.
Thank you.
Speaker 3: Thank you. Good afternoon and welcome to the Credit acceptance corporation 4th quarter 2021 earnings call.
Afternoon, and welcome to the credit acceptance Corporation fourth quarter 2021 earnings call.
As you read our news release posted on the Investor Relations section of our website at IR Dot credit acceptance Dot com.
Speaker 3: As you read our news release post on the Investor Relations section of our website at IR.creditsacceptance.com. And as you listen to this conference call, please recognize that both contain forward-looking statements within the meeting of federal securities law.
And as you listen to this conference call. Please recognize that both contain forward looking statements within the meaning of federal Securities law.
Speaker 3: 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 different materially from such states.
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.
Speaker 3: These risks and uncertainties include those spelled out in the cautionary statement regarding forward-looking information included in the newsroom.
Speaker 3: Consider all forward-looking statements in light of those and other risks and uncertainties.
Consider all forward looking statements in light of those and other risks uncertainties.
Speaker 3: Additionally, I should mention that to comply with the SEC's regulation G, please refer to the financial result section of our news release, which provides tables showing how non-GAAT measures reconplailed to GAAP measures . Our results-
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.
Speaker 3: Unit $1 volumes to client 22.6% and 12.7% respectively compared to the fourth quarter of 2020.
Dollar volumes declined 22, 6% and 12, 7%, respectively compared to the fourth quarter of 2020.
An increase in forecasted collection rates for loans originated in 2019 and 2020.
Speaker 3: An increase in forecasted collection rates for loans originated in 2019 and 2020.
Speaker 3: This resulted in a $31.9 million increase in the forecast of that cash flow, the smart loan portfolio.
This resulted in a $31 $9 million increase in the forecasted net cash flows from our loan portfolio.
Adjusted net income increased 12% from the fourth quarter of 2020 to $212 $6 million.
Speaker 3: Adjusted net income increased 12% from the fourth quarter of 2020 to $212.6 million.
Adjusted earnings per share increased 33% from the fourth quarter of 2020 to $14 26.
Speaker 3: adjusted earnings per share increased 33% from the fourth quarter of 2020 to $14.26.
Speaker 3: of the tax rate purchases of approximately 660,000 shares, 4.1% of the shares outstanding at the beginning of the quarter.
And stock repurchases of approximately 606000 shares for 1% 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.
Speaker 3: At this time, Ken Booth, our Chief Executive Officer, Jay Martin, our Senior Vice President in Finance and Accounting, and I will take your questions.
Ladies and gentlemen, if you'd like to ask a question at this time you will need to press. The Star then the one key on your Touchtone telephone to withdraw your question press the pound key.
Please standby, while we compile the Q&A roster.
And our first question coming from the line of Moshe Orenbuch with Credit Suisse. Your line is open.
Great. Thanks.
Couple of things I guess.
First first off in the in the release you talk about the January volumes being down 36, 6%.
I'm sorry.
236, 8%.
But you also mentioned that January 2021, which was particularly strong like how should we think about.
That commentary was was that just to January was that the rest of the quarter. Like can you can you talk about that a little bit.
January was.
In a relative sense was a pretty strong month last year I think we were down.
6% for the month of January versus the January of the prior year.
The quarter was.
Not that strong.
But still better than the quarters, we've experienced recently.
And again I believe that the strength in January of last year was due to stimulus.
Got it.
Okay.
And.
You mentioned this.
$31 9 million.
Kind of write ups on the 2019 and 2020.
As I look here. It says that there is 0.3% reduction in your expected cash flows for the loans originated most recently.
Yes.
Typically.
If you look at the most recent quarter disclosed.
There'll be a decline from our initial estimate.
As you point out the fourth quarter of this year. The decline was three tenths of a percent a lot of that is just due to.
The fact that.
We don't remove canceled consumer loans from the denominator in calculating the ratio.
Thats disclosed in footnote one to the table.
On page two.
But generally what you see them in the loan cancels occur early in the life of the loan and then after that what has historically happened as the loans outperform and that becomes a positive number.
That's what's happened historically, whether that will be the case in Q4, we'll have to see.
Got it thanks.
And then and you mentioned the 600000 unchanged shares that you repurchased could you talk a little bit about kind of how.
How youre looking at your leverage and what that might mean for the ability to buy back shares in the future.
We're continuing to think about.
Stock buybacks the same way we have in the past.
<unk>.
Want to make sure we have ample liquidity.
We have ample liquidity.
And believe that purchasing shares as a good use of shareholders' money.
Well.
<unk> <unk>.
Invest in stock repurchases.
Relative to financial leverage.
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Historically, we've repurchased more stock when we're lowly leveraged.
And then we're highly leveraged.
So I would expect that.
Stock repurchases, perhaps may not be as strong in the next couple of quarters as they were in the last half of this past year.
Got it thanks very much.
And our next question coming from the line of David Scharf with JMP Securities. Your line is open.
Hello, Good afternoon.
Thanks for taking my questions.
This may be kind of difficult to.
Pinpoint, but as we just think about.
The volume.
Pressures on the entire industry.
As well as your specifically.
Driven by just the success of used car prices.
Sort of wondering is there any.
Sort of metric or percentage decline.
Yeah.
In benchmarks like the manheim or an NDA.
Is there any sort.
Sort of.
Figure that we could potentially look to that would signal.
Sort of turnaround.
In consumer demand in your mind for example, Im looking six quarters back here.
Average contract size was 11% lower than it is now.
And I'm just wondering if there is sort of if not a silver bullet.
Is there a decline in the manheim or decline in average used car prices from today's level.
You would feel comfortable would probably be signaling a turnaround.
To positive year over year growth in unit volume for both you and the industry.
No I don't think you can say that there's a magic number out there with the manheim or any other.
Used car index.
Thank you.
Used car prices remain stable or increase.
I think thats, a bad thing from a volume perspective covenant.
Used car prices decline I think that's a positive and the more they decline.
The better, but I don't think its.
There is no magic number there is no cliff magically things.
Go back to normalize I could just.
Gradual.
Right right, Yeah, no clearly directionally.
We're kind of waiting for that turnaround I guess.
Sort of just debenture into your Crystal ball I mean, do you have any commentary.
Youre able to provide on your outlook for.
Used car volumes independent dealer health.
Deep subprime demand through throughout 2022.
I don't think that we have any unique insight there I think.
Your guess is as good as ours David.
Got it got it okay, well, thank you very much.
Our next question coming from the line.
Rob I have with autonomous research.
Hi, guys.
Hello.
Hello.
Can you can you just highlight or update us on what youre seeing.
Competitively in the market.
And now as you can see our volumes are down as you think about our marketplace I think the way to look at it is looking at our volume per dealer.
There is industry data that shows subprime is down.
I guess really that'd be my overall thought is volume per dealer and this shows the strength of the competitive market.
When I think historically any time the industry has had.
Access to lots of capital and the cost of that capital is cheap.
Okay.
Yes.
Pardon me. This is the operator I'm showing the speaker line has disconnected.
We will give it a moment until there with connect.
Please standby.
Okay.
Okay.
So we confirm a theater to the last response.
Okay.
Great.
Yes, Lucas you are now back online.
Okay.
This is Doug busk.
We are disconnected there.
I'm not sure of.
My last response was completely or not but I apologize for that.
Hey, Doug. This is Rob can you hear me I'm not sure if I am live either.
Yes, I can hear you.
Okay great.
Cut off right around and you were going into the.
When competitors have lots of access to capital and the cost of capital is cheap and then it.
And that's when it dropped off.
Okay.
Thanks for refreshing me.
Yes, so generally with those conditions exist.
The marketplace tends to be pretty competitive in.
The current environment is no exception there is.
Lots of companies out there with access lots of capital at very low cost.
Got it and then maybe.
To stick with that comment I mean, do you think that.
Rising interest rates here through 2022 would be enough to Dan competition or do you need.
Prevailing interest rates to be considerably higher than they are right now.
I think it's kind of like the used car price question.
Every little bit helps.
But.
I think it would have to be substantially higher.
Or a meaningful impact.
Got it and if I could ask one more on the consumer side.
Wondering if you could comment a bit on the potential impact of that inflation could have on consumers' ability to repay.
Inflation running as high as it was does that factor into your <unk>.
Expected collections in any way.
Okay.
No it doesn't.
We base, our forecasted collections on how loans with similar attributes.
Have performed historically.
So we don't have a macroeconomic component that we overlay on that.
Ill.
So.
We have a period of.
Significantly higher than normal inflation.
That has the potential to.
Impact customers' ability to pay.
Yes.
Okay. Thank you.
And our next question coming from the line of John Hecht with Jefferies. Your line is open.
Yes, thanks very much.
Just thinking about volume I mean, you touched on pricing and competition, but how much of your volume is impacted by just lower overall inventory levels.
Their industry factors.
And I think that's a significant thing that's impacting us right now.
I think honestly.
The last couple of Questioners are asked about when there might be a turnaround I think the most likely time there'll be a turnaround for volume for us it will be when.
Vehicles are more readily available and prices.
Kind of stabilize and maybe go back to normal where there become a depreciating asset.
Yes, I mean, and do you have any thoughts for based on what Youre hearing from industry sources win.
Whether it's off lease supply or some fleet sales or repossessions any sense for when that might start to occur.
Obviously, we spent a lot of time kind of scouring information sources to learn about that but.
Thanks.
There is a wide range of possibilities there that I've seen.
Assuming reasonable sources predict to be later this year and has seen a reasonable sources say it won't be until early 2024. So.
I think that there's a lot of uncertainty related to the downstream impact of the pandemic.
Until cars are available or not really sure when that will be but we still view it in the Grand scheme of things is a temporary situation that a permanent one.
Okay and then.
Obviously your yields yields benefited this quarter.
Strong performance.
And.
Obviously, you may have strong performance all the time and you may not but like what are like if we excluding the call. It the incrementally strong performance of some of the recent vintages, what do you guys think.
The yield on your.
What's the right yield in your portfolio as things normalize.
Are you are you talking about the GAAP yield or the adjusted yield correct, yes, just the GAAP yield which is effectively finance charges divided by the average loan balance.
Yes.
The GAAP yield is based off of contractual cash flows, which we know we're never going to make that yields we don't spend a lot of time focusing on it but.
<unk>.
GAAP yield we're we're reflecting today is.
Pretty much reflects the it's pretty close to the contractual yield on loans, we're writing today.
But again we.
Because of because of seasonal and the fact that our GAAP yields based on contractual cash flows we don't spend a lot of time focusing on that.
Okay.
And then.
Covers my questions I appreciate it thanks very much.
Yes.
Okay.
And our next question is coming from the line of John Rowan with Janney Montgomery. Your line is open good afternoon.
Soon.
Yes.
Doug you talked a lot about.
Car prices impacting volume I'm wondering what if any impact.
There was in the duration reduction in the fourth quarter from.
From a volume perspective, and whether or not you.
You were at 58 months again in January or if there was another duration cotton January affecting that year over year performance.
I don't know what the duration is going to be in in January .
<unk>.
The reduction from 59% to 58 again, just a function of car prices and affordability issues for consumers.
I would.
Expect that that probably continued in January but.
Don't know for sure.
Okay and then just lastly for me I think there was a relatively big increase in other income was there anything onetime in nature in there or what was driving that.
<unk> 3 million other income line.
Yes, it's primarily primarily related to our ancillary product profit sharing.
Out of that is driven by claims rates, we did see lower grade lower claims rates in the fourth quarter.
Can't really see it it's been volatile historically.
So it's not necessarily a permanent change I think it's just normal volatility within the profit sharing.
Okay alright, thank you.
Yes.
And at your line of Laythan gentlemen to ask a question. Please press star one.
And our next question coming from the line of Vincent <unk> with Stephens. Your line is open.
Thank you.
Two quick ones. So one is a follow up.
That other income line width.
The increase in ancillary profit sharing.
Is that something that.
<unk> credit is better we should expect to continue or is that sort of a onetime true up.
For this quarter.
Yes, I would say, it's not related to credit.
It's not necessarily a onetime true up.
Just how claims or claims rates have come in.
It's primarily related to our GAAP product. So I would say I do think we're helped out with some higher vehicle prices Theyre, probably had some impact on claims rates.
But historically.
We've seen a fair amount of fluctuation in our claims rates over time so.
Again, I would just consider it to be normal volatility.
Okay got you. Thank you and then the second one.
Just on expenses so.
Just wondering how to think about that going forward.
The salaries and wages that was up 46% year over year, but youre.
Your G&A expense was down 11% just how to kind of think about how you are managing.
Going forward. Thank you.
Well a lot of the increase in the expenses.
As we pointed out in the release just rate relates to stock compensation expense.
Relating to <unk>.
Stock options that were granted.
The executive team as part of a new pay plan.
That's really what's driving the vast majority of the increase in expense over the last couple of quarters.
Okay got it so that would be.
For both the so I guess that would be salaries and wages.
But the G&A.
On the other hand went down so that was nice within the G&A expense went down just wondering.
What we should be expecting going forward in terms of efficiency.
I mean big picture.
Our expenses as a percent of revenue or expenses as a percent of average capital.
Have declined over the long term as we've grown the business because we benefited from operating leverage.
As we're in this period.
<unk>.
There were not growing.
And average capital.
Perhaps be declining.
I think it's.
Logical to assume that.
Our operating leverage would be under pressure and could go the other way.
The degree to which does so we will just depend on what happens from a growth perspective.
Okay that makes sense. Thank.
Thank you Ed.
Okay.
With no further questions in the queue I would now like to turn the conference back over to Mr Park for any additional or closing remarks.
We'd like to thank everyone for their support 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 dotcom.
We look forward to talking to you again next quarter.
Thank you.
Okay.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
Okay.
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