Q4 2022 Credit Acceptance Corp Earnings Call
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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Okay.
Okay.
Good day, everyone and welcome to the credit acceptance Corporation fourth quarter 2022 earnings call.
Today's call is being recorded.
Chats, a 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, Doug bass.
Thank you.
Good afternoon, and welcome to the credit acceptance Corporation fourth quarter 2042 earnings calls.
Read our news release posted on the Investor Relations section of our website.
Our credit acceptance dot com and as you listen to this conference call. Please recognize that both.
Forward looking statements.
General Securities Law.
These forward looking statements are subject to a number of risks and uncertainties many of which are beyond our control, which could cause actual results to differ materially from such.
These risks and uncertainties include those.
Cautionary statement regarding forward looking information.
The new stories.
Consider all forward looking statements in light of those 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.
Our volumes grew 25, 6% and 26, 2% respectively.
Compared to the fourth quarter of 2021.
A decrease in forecasted collection rates for loans originated in 2021 and 2022.
Each decreased forecasted net cash flows from our loan portfolio by $41 million or 0.5%.
Adjusted net income decreased 26, 6% in the fourth quarter of 2021.
<unk> hundred $56 million.
Adjusted earnings per share decreased 17, 7% from the fourth quarter of 2021.
So $11 74.
Stock repurchases of approximately 208000 shares which represented one 6% of the shares outstanding.
The Corp.
At this time, Ken Booth, our Chief Executive Officer.
Jay Martin, our senior Vice President Finance, and accounting and I would say.
Take your questions.
Yes.
Thank you.
You would like to ask a question. Please press star one on your telephone.
Well I like to have the Q&A roster.
The first call questions I have is coming from Moshe Ari Busch of credit Suisse. Your line is open.
Great. Thanks.
Hoping you could give us a little bit of a.
Kind of help understanding you've had after several quarters of kind of write ups of your cash flow expectations for the last three they've been down in the mid Forty's Ats are now 41 again.
How do we think about like where you are sitting in this process like how is that and how should we think about how that affects the yield.
The adjusted earnings basis.
Well, we update our forecasts based on primarily on performance.
Loans with the same attribute to performed historically.
So what we've seen I believe for the last three quarters.
That performance was actually a little bit worse than expected.
At the end of the preceding Corp.
That's caused our forecast of future net cash flows.
To decline.
So.
Where we're at I think is possible say yet.
What happens to our forecasted collections and therefore, the adjusted yield on our portfolio is really dependent on how long.
Performance is in the future.
Right I don't think you gave any update in the release.
For January or anything like that.
Well, we did that we have volume and therefore, the first two.
Eight days of the month, but we don't have any.
Sure.
Sure.
And then Doug.
The other element is that.
The level of originations you just mentioned I mean, it was up a little bit of January was kind of flattish slightly down a little bit in terms of where it was in the fourth quarter.
And the spreads don't look like they got any better could you kind of characterize for us. It showed that the competitive environment. I think there are some people would've expected by now.
Got it.
That competitive.
You kind of balance shift away from some other originators.
I guess, where are you seeing kind.
Talk about that a little bit.
Well I mean, I think we had a strong fourth quarter from an origination perspective.
Through the first 20 days of January .
<unk>.
We had strong originations as well so I think that.
The numbers, we put up an origination perspective.
Oh really book.
Third and fourth quarter, and thus far in January indicate that the competitive environment has improved.
Got you.
And that.
The spreads that you are able to achieve and of course the difference between what youre forecasted collections in Europe .
Great for the launch.
Yeah.
The.
The spread we modified a table in the press release this year to show you heard this quarter to show you what the.
Thread was based on the initial forecast.
And what the spread is as of December 31, 2022.
And really since 2017.
The spread has been.
Proximately.
The initial spread has been approximately 20%.
The variability you've seen there has been primarily due to low performance. These efforts are expected.
In 19 and 40.
While performance was better than expected that had a positive impact on the spread.
And then in 2022.
Performance.
Plus slightly worse than expected.
Yes.
Better pressure on the spread.
Okay.
And then just last one for me just initial.
The initial spread in Q4.
Was was certainly better than it was in.
In the first three quarters of the year, but that's a relatively unseasoned book of business.
I'll just have to see what happens to loan performance.
Got it thanks and then.
Last one for me I mean, the first three quarters of every year you file the Q along with.
The earnings release, obviously in the fourth quarter, the 10-K takes a little while longer.
Hi.
Given all the activity this quarter.
Any chance that we will get an update on kind of the legal and regulatory situation before the cares Act.
Yes.
And then I can talk a little bit about it right now we generally don't comment on active litigation, but I will say we.
We disagree with the allegations in the complaint we intend to strongly defend yourselves and the pending lawsuit.
There was a time.
Presumably the regulatory expectations are more clear and enforcement was propelled me that didn't take compliance seriously.
Now this lawsuit my opinion reflects a different approach.
As a company, we always strive to comply with the extensive framework of laws and regulations that govern our industry and we will work hard to do what is right.
When you think about our industry and we provide financing options the dealers nationwide.
Enable dealers often opportunity millions of consumers.
Visible.
Approximately 30% of all consumer that's a 67 million adults.
Credit score below 678, which is a credit repair there's millions and millions more.
Their credit with visible.
If the allegations that lawsuit.
There'll be a significant impact on the finance industry and all of these consumers across the country.
Yes, we will be addressing that with the court during.
During the course of the litigation.
But again.
We disagree with the allegations.
Vigorously defend ourselves.
Okay. Thanks very much.
Thank you one moment, while we prepare for the next question.
Okay.
And our next question will be coming from John .
Rowan of Jamie Your line is open.
Good afternoon guys.
Hey, John .
Since you are willing to speak about the lawsuit a little bit I figured I would just add.
Or just to make sure that everyone understands and maybe just get your take on it. Obviously you can read the complaint we can see what the main tenets of it are.
Hi.
When you settled with Massachusetts, I want to make sure. There was nothing in that settlement that had anything to do with usury laws right.
The settlement isn't totally clear, but it looked like it was two technical issues that one was the Massachusetts specific requirement and another one was about posting some resale value on a on a repossession. There was nothing that you settled the Massachusetts from the main charge of usury that.
So you settled four if I'm not mistaken.
Yes, the settlement agreement revolve around the two issues that you mentioned.
Instantly.
Okay. So.
Moving past that obviously, there was a little bit of a jump up in G&A expense was that anything to do with legal expenses.
G&A expense increased due to increased expenses in the technology area and in legal.
Yes.
The provision expense is it safe to assume that excluding forecast changes that it's in the $90 million run rate based on the growth that youre putting on.
Yes.
It was less than that.
<unk>.
It was less than that in the fourth quarter.
The new loan.
Provision was $60 million.
Again keep in mind that.
Unit volumes in the fourth quarter are typically kind of a seasonal lull.
Okay and then just.
Again to go back to the competitive environment, obviously fourth quarter.
The funding markets for most subprime ABS, we're kind of in disarray or at least the spreads are really really wide, but we've seen a little bit of a retrenchment here in January there are a lot of sub prime ABS deals that have come out.
Yes.
Spreads are quite a bit lower than they were late last year. I mean is there anything that we can read through to the competitive environment.
How do you help us think of you know.
How this fits with you guys.
Cycle that brings some spread back to you guys. If this would be any indication of more competition. There is more less risk adverse funding markets. Thank you.
Yes.
Potentially that causes the market to be a little bit more competitive.
Youre right. The market told this year has been more constructive.
You still have a situation where base rates are elevated.
Credit spreads still not as high as they were in Q4 are certain higher than they were a number of years. So.
We'll have to see what happens.
C all of the competitive environment.
We'll come a little bit more intense.
Funding markets continue to be constructive.
I have to see how it plays out.
Yes.
Thank you one moment, while we prepare for the next question.
Okay.
Okay.
The next question will be coming from what Rob Wildcat.
Economists research your line is open.
Okay.
Hi, guys just one more on the on the funding market.
Given your origination growth and better spreads now.
Why not tap the ABS market yourselves.
Well, we certainly intend to.
But.
Ended the year, we had about one $6 billion in unused availability on our <unk>.
Revolving credit facilities.
Very strong liquidity position, but.
I mean, that's something we will do at the appropriate time.
Okay, so safe to assume and to tie it back to New York State Theres nothing in that lawsuit that would preclude you from continuing to tap the avs market right.
Correct, yes.
<unk>.
The complaints of complaint.
But there's nothing in there that would prohibit us from accessing the securitization market.
Got it and then.
To switch over in the press release, you called out at forecasted profitability on a few different vintages can you define that for US and then I'm kind of wondering why forecasted profitability for the 22 vintage would be significantly lower but the forecasted collections are only like a percentage point lower.
An initial.
I mean forecasted profitability the way we are defining if there is really.
Forecasted economic profit.
non-GAAP financial measure, we referred to in the press release.
Sure.
Relative to 2022 with Justin.
We're.
We've got pretty low standards for significantly.
Basically.
10th of a percent in the collection rate which is.
Its arguable, whether thats significant or not but that's the standard we've chosen to use.
Yes.
Okay.
Sorry, 1%.
Okay, so 1% on collections.
Significantly lower in 'twenty two okay got it got it.
And then one more.
Yes in past calls you have said that when youre growing originations.
We buyback less stock this quarter youre able to kind of do both.
What's going on there and how should we think about share repurchases. If you do continue to grow in 'twenty three.
As we've said before the first priority is always to make sure. We have the capital that we need to fund anticipated levels and one rig.
Originations, so that's going to be the first priority.
In terms of share repurchases I think it just depends on.
All of the capital markets function.
What our growth rates are.
And things like that but the first priority will always be the funds do level of loan originations.
Okay. Thank you.
Thank you one moment, while we prepare for the next question.
Our next question is coming from John Hecht of Jefferies. Your line is open.
Afternoon, guys. Thanks for taking my question.
Touched on earlier is that a question about.
The last three quarters write downs in cash, but I'm just wondering.
What do you like do you guys think about an attribution for that I mean is it tied to structural.
On the loans repaid.
Sure.
Asset values are declining.
Thank you have a sense for to the coordination of that over the recent quarters.
Yes, it's tough to say precisely, but I think it's like.
Likely primarily.
The impact of inflation on a subprime consumer and.
Then declining vehicle values over the last.
678 months.
And then I mean I don't.
No.
You'd be willing to do just that.
You guys probably in communications with your dealer partners all the time.
And your comments about inventory levels currently.
Volume will be.
Is it your perspective that kind of the worst is behind the dealer.
Meaning that the system is starting to stabilize or do you guys think there's more to come in terms of NIM.
Reduction of <unk>.
Demand reduction in power prices, how do you think about that what's your kind of forward perspective.
Used car prices have declined which has helped to address affordability issues.
Inventory situation is better than it was.
It's not where it was pre pandemic used car prices are still elevated.
Yes.
Where it goes from here I think it is anyone's guess.
We don't have the ability to predict the future so.
We'll just we'll just have to see.
Yes.
In mind I mean.
Thank you.
Maybe it seems like a more confusing picture would you consider yourself quite morrisville back then.
Or is there ways for you to tighten given that uncertainty or is it did you sort of keep eyes wide open and the day to day basis.
I mean, we always build up very significantly.
Turning to safety.
The way, we price our loans.
We recognized that if youre writing of 60 months.
There are some.
A whole host of things you can't predict that will occur over the next 60 months.
Local inflation do what one employment while used car prices do.
So the way that we address all of those uncertainties is by building a significant margin of safety in the way that we price.
We are writing business that.
Generally produces very high returns that we price our business. So that if loan performance is worse than expected.
Profitable.
Okay I appreciate the color. Thank you guys very much.
Okay.
Thank you one moment, while we prepare for the next question.
The next question will be coming from Ray Cheesman of Anfield capital. Your line is open.
Thank you.
Doug just following up on John's question.
As you look forward now.
I'm guessing you have a model of what you expect the world to do.
I'm wondering if you would be willing to share any of your modeling assumptions like where do you think unemployment will be at the end of the year, where do you think the 10 year will be at end of the year, the things that would drive that seasonal model.
I mean.
Like I just said in the last.
Question.
There's a whole bunch of things that are.
Forecastable.
It also.
We don't attempt to forecast the things around forecast all we just address those uncertainties by pricing our loads are the big margin of safety.
So.
When we.
Put together our forecast of future cash flows.
They're based on.
Actual loan performance in the historical.
Performance of loans with similar attributes.
Those forecast historically have been pretty accurate.
As we proceed into 2023, and we read a lot of the.
Press from the various talking heads about lower tax rebates and exhaustion of savings.
Is your expectation that your.
Pricing and risk adjustments.
Are underway to protect you.
So you are adjusting your terms on the fly and you're maintaining margins and maintain profitability and.
It's just over the course of the last couple of quarters that with the water seems to the tide is going out on the economy and I just want to make sure that.
I am confident you guys are.
As greedy as historically I am sorry, I have to say it that way, but highly profitable company and I just want to make sure that stays that way.
Yes.
When we're making.
Decisions about.
Although our price our loans, we are certainly considering what we are experiencing from our loan performance perspective.
And then just one more.
The fact that the used car market is dropping.
I guess I saw recently ally expect 13% and other people expect between 10 and 20%.
That's not great news for prior vintages, but it actually should be good for growth future vintages right.
I would agree with that okay.
Then thank you very much you give me some confidence thank you.
Okay.
Thank you one moment, while we prepare for the next question.
As a reminder, if you would like to ask a question. Please press star one on your telephone.
Our next question will be coming from China Q of Bank of America. Your line is now open.
Hi, Doug This is Shannon from Bank of America.
Thanks for taking my question.
So.
I think your bonds now are kind of trading in the low nineties. Then you have you talked about capital allocation with a focus on investing and maintaining enough.
Two originated your growth and volumes next year or this year, but with the bonds in the low nineties could you look to maybe.
We opportunistically addressing some of the maturities before they come to you in 2024.
Conceivably.
Explored.
Retiring some of the bonds early.
Obviously haven't elected to do anything thus far but we've we've taken a look at that.
And we'll just.
Yes.
Have to weigh the attractiveness of that alternative with.
The deep <unk>.
Best of new loans.
Thanks, and then I guess.
Previously you filed the 8-K.
Okay.
Expecting then New York lawsuit.
I guess have you had any or seeing anything from <unk>.
Any of the other states.
Potentially suggesting that they are moving forward with.
Lawsuits or you haven't really seen anything new from across yet.
We're not going to say anything about.
The existing lawsuit other than what Ken mentioned earlier in the call.
Okay. Thank you.
Thank you.
One moment, while we prepare for the next question.
Our next question is coming from Christopher Ryan.
Radcliffe Your line is open.
Hi, guys. Thanks for taking my question.
So is there any.
Timeline known right now about the CFPB lawsuit he can give us.
Yes, I can answer that one Phil.
Okay.
And then what was the average price paid for a share repurchase in the quarter.
It was 208000 shares.
At an average price of I believe 455.
Yes.
So that's around 100 million Bucks.
Got it.
Alright. Thank you that's all my questions.
Thank you.
Concludes today's Q&A session I would like to turn the call back over to Mr. Bass for any further additional comments 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.
You.
Once again this concludes today's conference.
Thank you for your participation everyone may disconnect.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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