Q1 2022 Credit Acceptance Corp Earnings Call

And welcome to the credit acceptance.

Corporations first quarter 2022 earnings call today's call is being recorded.

Today's earnings call will be made available on.

The website.

I would like to turn the call over to credit.

Keith.

Sir the floor is yours.

Thank you.

Good afternoon, and welcome to the credit acceptance Corporation first quarter 2022 earnings call.

As you read our news release posted on the Investor Relations section of our website at IR Dot credit acceptance dot com and ease to 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 both spelled out in the cautionary statement regarding forward looking information included in the news release.

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 volumes declined 22, 1% and 10, 5%, respectively as compared to the first quarter of 2021.

An increase in forecasted collection rates for loans originated in 2016, 2017 and 2019 through 2021.

Increased forecast of net cash flows of loan portfolio by $110 million.

Adjusted net income increased 20% from the first quarter of 2000 $21 million to $197 million.

Adjusted earnings per share increased 43% from the first quarter of 2021 to $13 76 assets.

Stock repurchases of approximately 802000 shares five 7% 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.

Thank you.

To ask a question you will need to press star one on your telephone.

A question please press the pound key.

Goodbye.

The Q&A roster.

Yeah.

Oh excuse me our first question comes from Moshe Orenbuch of.

Credit Suisse.

Great.

Thanks, Thank you very much.

Hum.

Doug you mentioned the improved cash flows and then there was a note that you also kind of removes the COVID-19.

Overlay forecast could you just talk about you know.

Are those the same thing in a different things and how that runs through the financials.

Help us understand thanks.

Sure we have a little more detail on page three of the release.

We did two things during the quarter.

One we felt we had sufficient data since the end of stimulus and the end of enhanced unemployment benefits.

To basically remove the COVID-19 adjustment from our forecast again, our objective is always to.

Forecast future cash flows as positive as accurately as possible and we felt that the COVID-19 adjustment was no longer necessary. Additionally.

Additionally, every couple of years, we go through a process, where we are.

Seek to enhance our forecasting methodology, we did that this quarter.

<unk>, some additional data and some new forecast variables.

Covid forecast adjustment increased the forecasted net cash flows by about 150 million enhanced.

Enhanced forecasting methodology decreased by $54 million.

For a total positive change of $96 million.

The way that you know those would flow through our GAAP financials.

It would be.

A reversal of the provision as indicated on page three of the release.

In our adjusted results.

Those changes would be reflected as a perspective yield adjustment that would impact our finance charges overtime.

Yes.

Great.

Any way to kind of just flesh out a little more what kind of enhanced methodologies caused that $54 million.

And a reduction in future cash flows.

I mean, it's we don't want to get into too much detail. There. It's something we do every couple of years and it's you know we have more recent data to rely on and we're always looking at new variables that we can incorporate them in the forecast so just.

It's something that we do periodically.

You know one year consider we're forecasting $9 billion.

In our forecast for that cash flows, it's not a really big change right.

Right got it and when you think about the fact that the kind of expected.

Your your expected cash flows for bank loans originated in 2022 or lower is that is that the reason I mean, there's lots of reasons because of that advanced methodology or.

Yes.

No. It really has it really has nothing to do with the new loans, It's just based on.

The existing loans on the book and what we believe is a better estimate.

Got it.

As we think about stock based comp.

After that and you won't be getting any any sensors to being that we should be adding to the expense line.

We had about 9 million in stock based comp this quarter.

That was down from about $19 million in Q4 on my page 39 of the.

Q footnote 14, we.

We have a footnote that shows that we expect to recognize $26 3 million in stock comp, although over the remainder of the year.

Perfect. Okay. Thanks, a lot.

Got it.

Thank you.

Our next question comes from.

Uh huh.

Kevin Laski ranges.

Your line is open.

Hey, So this question is for Ken.

You mentioned in the annual letter.

We rolled out a financing program for consumers with higher credit rating can.

Can you share some more information there kind of what's our competitive advantage what are we doing differently.

Information on that program would be helpful.

Okay, and we're just really almost an internal initiatives is designed to capture.

Consumers with just a slightly better credit profile.

We think we can be profitable at it.

Makes our product more available to the dealers. So it's a way to get more volume.

Ben.

Modestly successful so far we believe.

It's about 15% of our volume.

So I'll have to say about at this point.

Okay and are these loans also afforded under the portfolio program or is it more like purchase loans.

They are offered under both programs.

Okay. Okay.

And what's the kind of return on equity or return on assets, we are able to generate because I mean, the thinking is that as we go put on the credit spectrum. The competition increases right. Because there are many players who are trying to kind of get those loans because those are lower risk. So are you able to get the high profitability, which we usually make from.

Our legacy loans.

And we don't really talk about pricing and how much we're going to make on various programs I will say our overall goal is to maximize economic profit in the long run.

Feel like this program is consistent with that objective.

Okay. Thank you.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone to Australia.

Western press the pound key.

Our next question comes from Rob Wildcat of Autonomous research.

Your line is open.

Good evening guys.

Hello, Rob.

I wanted to ask you about the.

Unit originations in the quarter, you know based on where January was.

And where the quarter finished it seems like there was some notable improvement in February and March can you talk about what was driving that improvement.

Well I think as we pointed out in our Q1 release, we had a tough comp versus January of last year due to federal stimulus dollars.

Compared to the rest of the quarter was a little bit difficult February is very good.

But I think there's differences in the timing of tax season, and then in and then in March we had another tough comp due to stimulus dollars last year.

I think you know a relevant data point as we point out in APE.

April that volumes are.

Tracking better down about 14% and that the trend in April was encouraging.

So there's a I guess long winded answer there was a bit of noise in the quarter.

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So I think that the April .

Data point is irrelevant.

Okay. Thanks, and then.

Last time, we spoke I think the message here I thought the message was that the buyback probably wouldn't be able to continue at the pace. It had in the later quarters of 2021, but this quarter with 800000 shares repurchased was.

Was strong again, so can you just talk about what went into that and what your outlook is for any future buybacks.

I mean, we continue to think about buybacks. The same way, we would prefer to invest our capital in new loan originations because we think that's what's best for shareholders.

But if we can deploy our capital and loan originations at returns that we're happy with and we can buy the stock at an attractive price.

That's what we do.

I think that last quarter.

I was asked about as our leverage increase what that what that means for future stock repurchases.

I think you can look back and see that historically.

One we're lowly.

Leveraged all things equal we tend to buy more shares in one or more highly leveraged we tend to purchase fewer shares.

We're at the.

Higher end of the historical range today.

So you can you can draw your conclusions from that.

Okay. Thanks.

Thank you.

Again to ask a question. Please press star one on your telephone.

And next we have Alexander.

Most of Jefferies.

Your line is open.

Yes.

Mr Villa Lobos.

He is on mute please UN mute your line.

Perfect sorry. Thank you guys for taking my question did want to ask a little bit more about the just like write offs and recoveries. How you know maybe like dollar amounts and how these performed.

Versus prior quarters. Thank you.

And I think the best way to think about credit quality is.

Just looking at.

The table on page two of the release, but.

<unk> our initial forecast.

To our most recent forecast and you can see.

For the last 10 years on average we've been pretty close but.

We have four years that have underperformed, our initial expectations and the remainder performed better than our initial expectations I think thats, the simplest lens through which to view.

Credit quality I think the.

You look at the roll forward of loans receivable.

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The adoption of <unk> has had a significant impact on the <unk>.

Way, we provision in the amount of write off so will occur under Cecil.

Our write offs are going to be.

Higher than we were historically.

Either because we have the <unk>.

Gross asset.

We have an asset on the balance sheet that includes amount, we never expected to collect or because were recognizing revenue with the contractual yield as opposed to the yield we expect to earn so the.

Drawing conclusions about credit quality by looking at the <unk>.

Write offs.

Post adapting Cecil.

Tough to draw any clear conclusions there. So I'd just direct you to the table that I mentioned.

Perfect. Thank you.

Thank you.

And we have a follow up question from Rob a wildcat.

Economists research.

Hey, Doug.

Hi, Thanks for taking the extra question, Ken I wanted to ask you about the shareholder letter I thought there was a.

A big emphasis on technology going forward can you talk in a little more detail about the kinds of improvements do you want to make what those might do.

In terms of expenses or the investment required and what kind of benefit you think you'll you'll ultimately receive from them.

Yeah, I mean, obviously the business model has changed over the years, where technology is becoming more and more prevalent and we have invested in.

We've hired as you might have saw an announcement, we've hired a chief marketing and product officer.

So hopefully we will.

Will help lead our efforts in being a little innovative and making our product even more valuable to our dealers.

So we're continually looking for ways to improve the business.

But really.

As we invest in technology.

It's hard to say, what we're going to spend on it but we expect to get a return on it. So it's truly just an investment in our future.

But I don't really have hard data I wanted to share.

You know I don't know, how that's going to play out but.

The belief is the more valuable we can make the product to the dealer ultimately the better business, we make for ourselves and for shareholders.

Okay. Thank you.

Thank you.

With no further questions in the queue I would like to turn the conference back over to Mr. Buck.

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 and have a nice day.

Okay.

Hum.

Okay.

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Okay.

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