Q2 2022 Credit Acceptance Corp Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Yeah.
Good day, everyone and welcome to the credit acceptance Corporation second quarter 2022 earnings call 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 cheap Treasurer officer, Doug Busk.
Thank you.
Good afternoon, and welcome to the credit acceptance Corporation second quarter 2022 earnings call.
Read our news release posted on the Investor Relations section of our website at IR Dot 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.
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.
Unit and dollar volumes grew five 1% and 22% respectively as compared to the second quarter of 2021.
A decrease in forecasted collection rates for loans originated in 2020 through 2022, which decrease in forecasted net cash flows from our loan portfolio by $43 million.
Adjusted net income decreased 18% from the second quarter of 2000 $21 million to $188 million.
Adjusted earnings per share increased one 5% from the second quarter of 2021 to $13 92.
Stock repurchases of approximately 404000 shares which represented 3% of the shares outstanding at the beginning of the quarter.
And a 12 million dollar expense related to an agreement in principle to settle a previously disclosed class action lawsuit and a $20 billion increase in stock based compensation expense, primarily due to the retirement of our former CEO in May 2021, and the timing of shareholder approval.
<unk> for 2020, and 2021 stock option grants.
At this time, Ken Booth, our Chief Executive Officer, Jay Martin, Our senior Vice President Finance, and accounting and I will take your questions.
And thank you.
As a reminder to ask a question you'll need to press star one one on your telephone again that is star one one on your telephone please standby, while we compile the Q&A roster.
And one moment for questions.
And our first question comes from Moshe Orenbuch from Credit Suisse. Your line is now open.
Great. Thanks.
In the last quarter, you guys talked a little bit about your results and what you were doing with respect to kind of that.
Higher credit quality.
I guess.
I'm trying to understand you do have.
Your adjusted revenue, where the yield as a percentage of your average capital.
It did go up in the quarter.
Could you just kind of square for us how to think about that.
What's happening in terms of the actual yield on the portfolio or is that a function of.
The denominator could could you talk about that a little bit. Thanks.
Yes, the adjusted yield on the portfolio increased this quarter and that was primarily due to loan performance in Q1.
Being quite a bit better than we would expect or we expected.
As you can see in the press release, our loan performance slightly underperformed our expectations this quarter.
All else equal that will have a negative impact on the yield in future periods.
Got it thanks.
But thats youre, saying its separate and distinct from from the mix in terms of the kind of higher quality loans that you're originating.
Correct, Yeah, it's all relative to our initial expectations and what happened during the period.
Got you.
I guess when you think about that because sometimes you talk about like a change in methodology that results in that there was no mention of that at this time so.
Is there anything that you could kind of point to as like the root cause of that.
Their performance kind of changing from first quarter to second quarter. You had said it was better than expected in the first quarter.
Yes, it's tough to say precisely why it occurred.
But it's likely due to a few factors obviously.
At the end of stimulus and supplemental unemployment benefits and perhaps it took a little while for consumers to work through the savings to date accumulated during those programs and then I think the other thing thats.
Impacting the consumer out there is just the inflationary environment.
So is it reasonable to expect that that would continue into future quarters.
I can't predict the future any better than anyone else, but.
I guess my expectation is that as long as inflation remains elevated.
No nothing else changes in a material way that I think thats, probably a reasonable assumption I mean, I think that we had a two year period, where loan performance was significantly better than expected.
Those tail winds are no longer present and.
There are some potential headwinds such as inflation.
Got you and then last one for me is that it also just seem that it.
Rolled through the second quarter same sort of <unk>.
<unk> that your capital return was slowing.
Yes.
And it's been.
June July probably pretty pretty much de minimis.
Kind of thoughts there as we go forward.
Like we've said on prior.
Hello.
Got it.
Please remain online your conference will resume shortly.
Okay.
Okay.
Yeah.
Okay.
You're saying I misunderstood.
Stock repurchases.
Hi.
Stock.
Thank you.
Okay.
Youre back on yes.
Okay, we're back on.
Moshe I'm not sure how much of my response, there you heard or didn't hear.
But I guess I'll just assume you didn't hear very much of it and I would say that as we've said on prior calls historically, we return less capital to shareholders the higher our leverages and the more we are growing.
And in recent periods, our leverage has been at the high end of the historical range.
And in the second quarter, we started to see some more positive results from a loan growth perspective.
Great. Thanks, Doug.
Thank you.
Sorry about the interruption.
No problem.
Thank you.
And one moment for questions.
And our next question comes from Ray Cheesman from Anfield Capital Management. Your line is now open.
Doug you mentioned it.
Inflation is a headwind.
Is the Manheim index finally, showing some softness in the used car market, where I believe most of your portfolio exists.
Is that an impact that also will.
We will be a headwind going forward versus the terrific lifted gave that over the last eight or 10 quarters.
We haven't seen.
Any.
Material move in used car prices relative to the vehicles that we're disposing of at auction.
But it certainly is a potential headwind.
Used car prices continue to be at elevated levels.
I can't predict the future, but at some point it seems reasonable to expect that they.
They have to revert to more normal levels, but.
How quickly and how dramatically that occurs is anyone's guess.
Okay.
Also you guys took off the COVID-19.
Covid overlay I guess in the first quarter.
And as we look forward.
And I know youre not a big fan of looking telling us forward, but when I have guys like AT&T, telling me that they got customers, who can't pay for their shell phones.
That's new news and so.
And then you clearly see that the bottom portion of the FICO scale struggling as you mentioned inflation amongst other things less government support programs et cetera.
Okay.
You also said the last two years have been at a different time when do we get back to normal where where performance say from 2015 to 2020 prior to Covid is what we would expect to see going forward in these.
It's weird that two years kind of flows through and finishes does it take.
Two quarters six quarters 12 quarters.
I don't think anyone really knows I mean, I guess it define it depends on what you define as normal but.
We're a little more normal, but we no longer have stimulus and unemployment benefits, but we're definitely abnormal and we're experiencing the highest inflation since the eighties.
So we continue to be an unusual environment and.
One that returns to normal is anyone's guess.
Are there any.
An example, onemain the spring leaf lenders that also lend to la.
Lower FICO customers has changed the credit box and quote unquote tightened things up are there adjustments that credit acceptance, just making to its ongoing business model to try to.
Stay ahead of any changes that they expect to occur in a couple of quarters ahead.
We're always attempting to forecast collection rates as accurately as possible and to the extent that we need to make changes to do so we do that.
Our practice not provide details relative to any adjustments that we do make.
Okay. Thank you and congratulations by the way on that.
Finding middle ground on that lawsuit and putting it aside.
Thank you.
And thank you.
And one moment for questions.
And our next question comes from Matthew Harwood from Jefferies. Your line is now open.
Okay.
Actually it's John Hecht from Jefferies.
Thanks for taking my questions.
I guess I guess broadly speaking just because.
Most of US are aware the capital markets are a little bit of disarray as spreads widened.
How does that impact.
Management sticking there in terms of volumes and so forth do you do.
You guys had been serial Israel issuers with a big buyer base, but does the current state of the capital markets affect your thinking at all.
Yeah.
Certainly we've noticed we completed a deal recently.
The capital markets are functioning differently than they were six to 12 months ago. So.
We're we're aware of it.
We're monitoring it closely so we're factoring it into the way we're running the business for sure.
Okay and then.
The spread as you guys kind of highlight the spread in the different courts evidenced on both the purchase and the dealer program loss of spreads.
Certainly as long as I can remember although level.
Any commentary on that or should we think that we're bottoming out here.
I guess, the way youre underwriting and issuing how do we think about what the spread might go.
We typically don't.
Discuss our pricing strategy other than to say, we're always trying to maximize the amount of economic profit that we originate.
So that would be economic profit per loan times, the number of loans, we originate so if we felt that it.
<unk> made sense to pay more.
Have a lesser spread but write more business, we do that Conversely, if we thought it made sense to pay a little less than half.
Larger spread but do a little less volume, we do that too. So we're trying to we're trying to price the product optimally.
Okay.
And then last question and I know Theres some seasonal element.
Most of that but you get a pretty big inflow of new dealerships, how do we think about that.
I think a lot of that is probably just.
Due to the fact that.
The sales team has been able to get out and have a lot more face to face dialogue with dealers.
They were over the last year or two.
<unk> also had.
What appears to be a somewhat of an improvement in the competitive landscape, which.
<unk>.
Generally seems to increase dealers interested in our program as well so I think it's likely a combination of those two things.
Okay. Thanks very much.
You bet.
And thank you.
And one moment our next question.
And our next question comes from Diego <unk> Silva from P. Squared asset management. Your line is now open.
Hi.
Thank you very much for taking my questions I have three of them.
The first one is.
And following up on the previous one.
One thing I've noticed is that over the last two years, we've seen both with grad going down but at the same time.
Average loan term going got is this just related.
The cost, especially on the term we're likely to be the car prices being at much higher levels are I mean.
Im just trying to understand.
The model being very different or just the industry getting more competitive.
I mean, I think the loan size has gone up because of the elevated used car prices.
The term has remained about the same.
And Thats just due to the fact that were financed in a slightly different vehicle.
Just two.
Dress consumers' affordability concerns.
Your other question related to the spread.
The spread has declined over the last couple of years, but a pretty pretty significant reason for that was the.
Better than expected performance for the loans originated at 1920 and to a lesser extent 2021.
Got it got it and then on my last question, which is.
Two part that related with your with your existing where you are exiting.
Kind of.
Disclosures on potential legal risk I guess, the first parties.
Is there any parts of your recent settlement on there.
Take losses did you guys have to introduce any sort of affordability tests or did you have to change the way that you conduct your business in those state by any form because when I was reading through the settlement.
I want you saw that.
Then the final piece that I think there wasn't anything any changes in the business itself.
I mean.
You are basically correct.
No material changes, we made some changes.
Back in 2018 to.
Modified <unk> business practices in light of some court rulings.
But other than that the settlements themselves.
Didn't require <unk>.
Significant modifications and business practices.
Perfect and then the last part of your question if I may just.
He then yet based on that on that.
On the discussions.
And the interaction you guys are having with the CFPB.
Regarding the notice that they serve you in the.
Beginning of this year.
I mean, we can't really comment beyond what we've disclosed in our 10-Q.
Understood.
Thank you very much.
And thank you.
And one moment for questions.
And our next question comes from Robert Wild <unk> from Autonomous Research. Your line is now open.
Hi, guys. Doug can you expand on that point, you made a moment ago about the improved competitive landscape.
Yeah.
I mean.
The way that we conclude that it's improved as we look at our volume per dealer, which improved a little bit in the quarter.
We also get anecdotal feedback from our sales team.
And from dealers.
It seems like the competitive environment has improved some.
Exactly why it's difficult to say, but I think likely candidates are.
Increases in interest rates.
The choppiness in the capital markets. So we discussed earlier.
And potentially operators being concerned about.
Future trends and credit due to things like inflation inflation and potentially declining used car prices I mean, it's tough to know precisely but.
Those seem like good candidates for any improvement that might be out there.
Okay got it thanks, and then I also wanted to ask you about the leverage level first do you have any firm caps on leverage whether that's a management or cover.
Covenant driven.
We don't have firm caps from a management perspective, we obviously have financial covenants that we need to adhere to.
Can you.
Just let us know what those covenants are.
Yes, I mean, there are public in our debt vacuum and so.
Under our current accounting that's existed since one one of 'twenty, we have a net funded debt to equity ratio of five 6% to one.
Under our senior notes.
We can't make a restricted payment, which was basically a buyback if the effect of such payment would be the cause.
Our net funded debt to equity so that less unrestricted cash.
To exceed $3 two five to one on the accounting that existed at the time of issuance so pretty one 120 accounting.
Okay. That's a good segue to my next question actually so.
That cap might not be impacted so much by the GAAP provision as you start to grow again.
GAAP provision grant is weighing on your building retained earnings in equity is that right.
That's correct.
Timing of income recognition under under.
Seasonal is significantly different than it was under our prior basis of accounting.
Okay. Thanks, and then if I could just ask one more quick one I noticed that for the past few quarters. Other income has been benefiting from a decrease in average claim rates on the GAAP contracts, if I think about <unk>.
The elevated cost of replacing a car I would expect folks to be pretty eager to to make a claim on those contracts. So what do you think is the driver of the decrease in claim rates lately.
Well I think actually the.
The provision for claims Thats included in our income statement is on.
One of our vehicle service contract products and I believe that claim rates.
Our claims as a percent of premiums earned were actually up this quarter.
So two different products you have guaranteed asset protection.
Which.
<unk> is included in other income and ancillary product profit sharing and then you have the provision for claims on.
One <unk>.
Vehicle service contract product that is go through the provision for claims line.
Okay that makes sense. Thank you.
And thank you and one moment for our next question.
And our next question comes from John Rowan from Janney. Your line is now open.
Good afternoon guys.
Doug I, just wanted to sort of make sure I understood your earlier comment on.
Inflation and how it impacts your consumers because it sounded like you were talking about whether or not the impact of the vehicle prices and obviously for a long time, we've had a conversation roddick vehicle prices is not having a big impact on your company, where you're really only talking about payment.
Payment rates are we talking about repossession and changing repossession rates and severity. Thank you.
No I was talking about it impacting the customer's ability to pay if they've got to spend money for gas in their food bill costs more of Thats, what I was talking about.
Okay. Thank you because there's a whole conversation with the manheim in there as well so I want to make sure I understood. What you were talking yes. That's my question. Thank you.
Thanks, John .
And thank you.
And again, if you would like to ask a question that is star one one again, if you would like to ask a question. It is star one one and one moment for questions.
And we have a follow up from Ray Cheesman from Anfield Capital Management. Your line is now open.
Doug.
One of the one of the other people who also is in the lending business that yearend indicated recently from a competitive standpoint that the credit unions.
We're used to.
Words that verged on out of control, where everybody else was raising rates to accommodate changes in the market rate structure and credit unions, where in his opinion very much more aggressive than they should be I was just wondering if you see anything like that or if you have said to me in the past that generally when economic.
<unk> get less great some of the east the lazy capital pulls back and lets you guys do better.
Any comment on that.
Credit unions have generally written a lot of subprime auto finance business over time.
I'm not close enough to the data to really say, whether they've gotten materially more aggressive in the current environment or not I'm sure are and.
Analytics people know the answer to that but I haven't I haven't asked them that question. Thanks.
Thanks very much.
Okay.
And thank you.
With no further questions in queue I would like to turn the conference back over to Mr. Busk for any for any additional or closing remarks.
We'd like to thank everyone for their support and for joining us on our conference call today.
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.
Once again this does conclude today's conference we thank you for your party participation.
Yeah.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
Yes.
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Okay.