Q3 2022 Credit Acceptance Corp Earnings Call
Good day, everyone and welcome to the credit acceptance Corporation third quarter 2022 earnings call today's call is being recorded.
Webcast and transcript of today's earnings call will be made available on credit acceptances website. At this time I would like to turn the call over to credit acceptance Chief Treasury Officer, Doug bass.
Thank you good.
Good afternoon, and welcome to the credit acceptance Corporation third quarter 2022 earnings call.
As you read our news release posted on the Investor Relations section of our website.
IR docs 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.
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 29, three and 32, 1%, respectively as compared to the third quarter of 2021.
A decrease in forecasted collection rates for loans originated in 2019 through 2022, which decreased forecast of net cash flows from our loan portfolio by $85 million or.
Or <unk>, 9%.
Adjusted net income decreased 18, 5% from the third quarter of 2000 $21 million to $179 million.
Adjusted earnings per share decreased three 5% from the third quarter of 2021 to $13 36.
Stock repurchases of approximately 54000 shares which represented 4% 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 at this time, we will conduct a question and answer session to ask a question you will need to press star one one on your telephone and wait for your name to be announced please standby, while we can buy all the Q&A roster.
Our first question comes from the line of Moshe Orange book from Credit Suisse. Your line is now open.
Okay.
Okay.
Yes.
Moshe Your line is now open.
Okay, sorry about that.
I guess I'm trying to kind of.
Think of a way to kind of connect.
The slower.
The slower level of collections that youre observing.
And what the changes are that you're making to your to your estimate of total collections I think the number was roughly twice as large in Q3 as it was in Q2.
And maybe could you talk about how to relate that to kind of the year.
Adjusted yield adjusted revenue as a percentage of adjusted capital.
<unk>.
Well I mean relative to forecasting we always try to forecast collections as accurately as possible and we price to maximize the amount of economic profit.
We expect the loans, we're originating will produce over time.
In doing so we certainly consider recent trends in loan performance.
So we're basically taking all the information that we have at our disposal and using that to forecast loan performance I think it's important to note that forecasting collection rates is obviously pretty challenging.
Our business model is designed to produce acceptable returns even if on performance is less than forecast.
Having said that the collection results during the quarter.
Together with recent originations.
Cause the adjusted yield apply to decline from where it was in Q3 of 'twenty, one and where it was.
Last quarter.
So that the collection performance in the quarter did contribute to a reduction of the adjusted yield.
Is there something I missed.
I guess I'm trying to think about the adjusted yield into Q4 given that the.
The reduction in collections in Q3 was roughly double where it was in Q2.
Is it kind of linear like how do we think about the debt reduction and yield it was.
Something on the order of 100, and some odd basis points from Q2 to Q3. When there are a few different different moving parts. There I mean, obviously what happens to loan performance in Q4.
<unk>.
Expected return on recent originations.
<unk> contribute but if you hold everything constant.
Decline in the.
Collection performance security Q3 would have a negative impact on the adjusted yield in Q4, but as I pointed out there are a couple of moving parts there.
Alright got it.
And.
This is all kind of occurred in something of a roughly stable employment environment.
Can you kind of think about.
How we should think about those rates.
If employment where to improve or if it were to deteriorate from here.
Sure.
<unk>.
Okay.
The best thing, we can really look at there is our experience during the credit crisis.
If you look at the 2007 loans.
Which were originated in a pretty challenging environment.
A challenging competitive environment, which tends to hurt one performance and then they were serviced in a way no nine with the unemployment rate went from 5% to 10%.
<unk>.
We did miss our forecast, but we missed our forecast by somewhere between.
250 to 300 basis points now.
Not saying Thats, what would necessarily occur this time.
But during the credit crisis our loans.
Our loans performed pretty close to our expectations.
Got it thanks.
Last thing for me is it looks like in the third quarter Youre spread on new loans actually improved from the first half just talk about the underlying.
Factors there thanks.
Yes.
It did improve by 100 basis points.
We try not to get into specifics.
Pricing and forecasting changes for competitive reasons.
Okay, Alright, thanks, Tim.
Thank you one moment, while we queue up our next question.
Okay.
Our next question comes from John Rowan with Janney. Your line is now open good afternoon guys.
Hey, John .
I'm going to ask a different version of the last question.
So youre advance specifically in the third quarter was down a decent amount of spread was up.
Your average volume per dealer partner was up.
Those things typically.
And the implication if you want to read the tea leaves as far as the competitive environment and so I'm wondering if you could comment on that and maybe.
And this conversation overlay, what's going on in the ABS market.
Whether or not smaller issuers are having trouble accessing the ABS market with what's been a pretty volatile spread environment, and whether or not thats, helping you competitively I know, it's a loaded question, but I feel like all of those intertwining.
Have a discussion on it.
Yes.
I think youre right.
I think.
I don't know exactly what's in the minds of all the competition, but.
Obviously.
<unk>.
Conditions in the ABS market.
Have been.
Challenging as of late.
Base rates have increased and credit spreads have increased.
Particularly for subordinate bonds.
So.
It wouldn't surprise me if.
People have.
Reacted to that in our pricing their product somewhat differently.
They were.
Six months ago site.
And I guess.
One of the competitive advantages that you.
<unk> you have had in prior disruptions, particularly with the ABS market is the ability to continue to access it and I'm wondering where do you think your spreads are going to forget the changes in benchmark that is what it is.
But do you think your spreads are going to continue to widen out.
How do you see your ability to access the ABS market.
On.
Yeah.
I don't know, what's going to happen to our spreads in the future.
A function of capital market conditions.
Certainly we think we present.
Our compelling credit profile for investors.
If you go back to the.
Great credit crisis, I mean, there was a period of time when no one was able to access it so.
I think it really just depends on how challenging capital market conditions.
Ill become I think we obviously did very well during the credit crisis.
I think a lot of that.
Despite being unable to access the ABS market for a period of a year or so a lot of that was just the way.
We positioned ourselves we would have.
And.
The same is true today, we have a conservative balance sheet with modest leverage.
We have a significant amount of unused availability on our revolving credit facilities.
So I think we're yes, I can't say, what's going to happen in the ABS market, but I like the way that we're positioned at the current time.
Okay. Thank you very much.
Yes.
Yes.
Thank you one moment our next question.
Yeah.
Our next question comes from the line of Robert <unk> with Autonomous Research. Your line is open.
Hi, guys, Doug I, just wanted to double click on something you said when you hold everything else constant third quarter.
Forecasted collections would have a negative impact on fourth quarter adjusted yield is that a one time effect as in the fourth quarter adjusted yield would be lower and thats, it or does that trickle in over the LIFO.
The portfolio, our loans or anything like that.
Yes.
We are recognizing revenue on a level yield basis on our adjusted accounting.
If loan performance didn't change after Q3.
That lower yield would be <unk>.
<unk> in Q4 and subsequent quarters.
Okay got it got it and then just one more on competition.
Subprime auto broadly has been a soft spot consumer credit curve for a little bit of a while now do you get the sense that.
Accelerating losses are causing competitors to pull back or is it more funding cost driven.
I don't have I don't have perfect insight into that.
My understanding is that credit in.
Subprime land is generally.
Normalized over time.
It's certainly not as good as it was in 2020 one.
<unk>.
But I'm not I'm not close enough to what our competitors are seeing to comment beyond that.
Okay. Thanks.
Yes.
Thank you and as a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced.
One moment for our next question.
Yeah.
Our next question comes from the line of Jason Hahn with principal Global investors. Jason Your line is now open.
Good afternoon, guys and thanks for taking the question I guess, maybe piggyback a little bit off the last question, but.
We look at a lot of different metrics for your companies, but one of the ones. We look at is just sort of.
The overall financial health is just debt to cap.
And that that ratio.
Ticked up to about seven.
75% for the last few quarters.
And then in terms of your funding mix in terms of that we'd look at.
Our senior unsecured debt to your secured debt and that that number tends to bounce around I don't know, 20% or so for the last few quarters as well and I guess, just as you've seen in the origination market turn and pick up pretty meaningful meaningfully is there is there a target funding.
You have for each incremental dollar of sales or is there is there a upper bound on where that debt to cap or that.
On your unsecured to secured funding ratio might trend over the next few quarters.
We don't have we don't have specific targets for either debt to cap or as I think of that debt to equity or the mix of unsecured to secured.
I mean, the way that we have.
Approach. It is we take a look at different financing strategies of look at.
Set the financial projections.
Try to come up with the funding strategy.
<unk> is a good result, when the capital markets are open to the cabinet eating and produces an acceptable result, when capital market conditions are more challenging.
So we don't have specific.
Targets, but we're certainly considering.
Risk and refinancing risks as we're making our decisions there.
<unk>.
Obviously, the leverage has ticked down this quarter.
That's really just due to the fact that we're deploying more capital and funding.
The growth in loan originations.
As opposed to repurchasing shares so.
That's caused our leverage to <unk>.
Moderate a little bit.
It is now.
The leverage that we're looking at today is not directly comparable to what it was prior to January one 2020.
Two different methods of accounting here.
I think our leverage are pretty 2020 accounting is about.
Two five to one.
So that would still be kind of the rough.
Roughly at the high end of the historical range, but it's.
So obviously lower than on our current accounting.
Sure.
Accounting change that's fair because that.
Definitely.
Significant impact I just didn't know if there was.
Just an upper bound on that ratio, where there was a comfort level or a lack of comfort for management, but your answer is helpful. Thank you.
Yes, I mean, there is not a hard and fast.
Rule, but if you look at our track record, we've I think we've run the company.
Pretty conservatively for a long period of time and I think you should expect that to continue.
Good morning, Thank you.
Okay.
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.
Wed 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.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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