Q1 2023 Credit Acceptance Corporation Earnings Call

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Yeah.

Good day, everyone and welcome to the credit acceptance Corporation first quarter 2023 earnings call.

Today's call is being recorded.

Webcast 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 first quarter 2023 earnings call.

As you restart news release posted on the Investor Relations section of our website at IR Dot credit acceptance Dot com.

As you listen to this conference call. Please recognize that will contain forward looking statements.

Federal 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.

Sure.

Right.

These risks and uncertainties include those spelled out in the cautionary statement regarding forward looking information included in the news.

Consider all forward looking statements in light of those.

Additionally.

You mentioned that to comply with the SEC's regulation G. Please refer to the financial results section of our news release, which provides tables showing.

Majors reconcile to GAAP measures.

Our GAAP and adjusted results for the quarter include.

Forecasted profitability for consumer loan assignments for consumer loans. Aside the 2000 22022 that was lower than our estimates at March 31 2022.

Due to acquired it.

Client and forecasted collection rates during the last three quarters of 2022.

Primarily as a result of a decrease in consumer laws prepayments.

Stable forecasted collection rates during the first quarter of 2023.

With forecast net cash flows from our loan portfolio, increasing by $9 $4 million.

1%.

Comparison, our results for the first quarter of 2020 to reflect an elevated consumer wall performance. That's followed the distribution of federal stimulus payments and enhanced unemployment benefits.

Growth in consumer loans, the seismic volume as unit and dollar volumes grew 22, 8% at 18, 6%, respectively as compared to the first quarter of 2022.

The average balance of our loan portfolio on a GAAP and adjusted basis for the first quarter of 2023.

<unk>, 8% five 1%.

<unk> <unk> as compared to the first quarter of 2022.

Average balance of our loan portfolio on a GAAP and adjusted basis for the first quarter of 2023 increased 1% and one 3% respectively as compared to the fourth quarter of 2022.

The initial spread on consumer loans aside that the first quarter of 2023 was 21% compared to 19, 4%.

The loans are signed in the first quarter of 2022.

At 29% consumer loans.

Fourth quarter of 2022.

Growth in operating expenses of 14, 4% as compared to the first quarter of 2022.

Marilyn due to an increase in the number of team members and our engineering Department as we are investing in our business to enhance our products and transform our technology systems to be more dealer and customer focus.

Adjusted net income decreased 35, 6% for the first quarter of 2000 $22 million to $127 million.

Adjusted earnings per share decreased 29, 4% for the first quarter of 2022.

At this time, Chad Booth, our Chief Executive Officer, Jay Martin, Our senior Vice President and finance and accounting and I will take your questions.

If you would like to ask a question. Please press star one one if your question has been answered and you'd like to remove yourself from the queue. Please press star one again.

First question comes from Moshe Orenbuch with Credit Suisse. Your line is open.

Great. Thanks, Chuck I was hoping you could just like.

Kind of talk a little bit about you talked about stable collections, but slower net cash flows just talk a little bit about what the two of those things.

How they affect.

Great.

Well.

The stable cash flows.

All else equal.

The stable forecasted collection rates.

All else equal.

Well.

Yields to be more stable than it would've been.

The forecasted collection rates have gone up or down.

Obviously, what happens in future periods.

The yield on new originations impact that as well.

It's nice to have stable forecasted collection rates.

After we had the last three quarters of 2022, where we have modest declines in the forecasted collection rates.

In terms of the slowing of the timing for <unk>.

The net cash flows made all else equal that clauses.

Decline in the yield on our portfolio.

Because obviously cash flow is coming into over a longer period of time, we less current dollars then yes. They came out of over a shorter period of time.

And which of those impacts caused the $44 million provision.

Provision for forecast changes.

The.

Slow down the gap well timing.

Got it okay.

And when you talk about that.

Spread on the loans acquired in the period.

How do we think about that relative to changes in interest rates or how should we think about it.

Hum.

What we're trying to do when we price our loans as we're trying to maximize the amount of <unk>.

Economic profit, which is economic profit per loan times that number of loans originated.

Economic profit.

So the interest expense.

So if interest expense goes up.

And we want to earn the same return.

Yes.

Yes.

Okay.

That needs to be factored into our pricing just like any other.

Got it okay. Thanks, I'll get back in the queue.

Thank you. Our next question comes from Robert <unk> with Autonomous Research. Your line is open.

Hey, guys I wanted to ask a question about unit originations I think you had said back in January that they were mid February maybe they were up 30.

39% in June 23, and I think they finished up in the high <unk> this quarter, which implies a decent slowdown in February and March So just how much did.

The growth rates.

By month in the quarter.

Sure.

39% in January 27% in February and 12% in March.

I think a fair amount of the variability in growth rates during the quarter was primarily due to differences in the strength of a prior year comparables.

We had a bit of a soft January in 2022.

February and March.

We're certainly better so I think that.

Prior year comps that a fair amount to do with them.

Okay, and then <unk>.

Industry wide I think things looked maybe the most stretched.

'twenty, one and maybe into early 'twenty two so.

Coming up on <unk>.

18 months from that point.

Rationalized their underwriting.

The industry is very fragmented so I don't have tremendous insight into.

How each industry participant is reacting to.

More challenging credit environment.

I can look at.

Industry statistics as published by auto cow and see that.

More people appear to be tapping of the brakes that are pushing on the gas so that would.

Leading me to believe that.

Incrementally more conservative.

Okay. Thanks.

Thank you. Our next question comes from John Rowan with Janney. Your line is open.

Good afternoon guys.

Hey, John and Doug you just gave a bunch of numbers regarding kind of the month by month I think it was unit volume correct.

Was there any change in underwriting that obviously you mentioned the year over year comps that's fine, but you did have a relatively big decrease in the advance rate here for the quarter I am wondering if there was any.

No coincidence with a change in the advance rate and also the slower number for March.

Yes.

Better number at April one and if you adjust for the number of days it was.

18%.

So paper.

April was better than March.

I mean as you rightly pointed out.

Vas for eight was.

Lower Q4, and it was lower in Q1.

General.

<unk>.

Les you pay the dealers the origination and the fewer loans you originated so that.

That likely had some impact on volume.

Okay, and then obviously the advance your initial advance rate for the year is 21% it looks like it's the highest number since 2016 I'm wondering if.

Maybe it's in the press release, having gone through yet but is there an initial advance rate for April .

No there is noise.

Okay, and then just lastly, any updates on the CFPB and New York AG issue.

No.

Latest and greatest is in the 10-Q that we filed today.

So it was just from where it was and there is just a.

A motion to dismiss the whole case correct.

Correct, Okay, alright, thank you yep.

Thank you as a reminder, if you'd like to ask a question. Please press star one one.

Our next question comes from Ray Cheesman with Anfield Capital Management. Your line is open.

Doug Doug I'm wondering this is such a unique environment.

It's been many many years since we had rising rates rising inflation credit standards tightening lowered snap payments lower tax refunds school debt pay Vince restarting how do you I mean, how do you program that into a computer it to protect you guys against.

You know people taking advantage of.

You've got capital, it's very attractively priced congratulations on the.

Our house extension the other day.

And you you're a grower and so well.

Well maybe.

<unk> is letting theres runoff and capital one lets say as run off you guys are you're in the trenches you're in there fighting, but how do you how do you take all that in and pick the good loans with the good payers on the good collateral versus everything else out there that clearly is piling up in some of the ABS numbers.

Well I mean.

We have a pretty good track record at being.

Abel is satisfactory predict collection rates.

Overall large number of loans.

We don't have the ability to predict individual outcomes. So <unk>.

<unk>, which consumers are going to lose their job and 18 months.

Which ones got encounter medical bills or what have you, but we have shown the ability to be predictive over a large number of loans.

Having said that there are a whole bunch of.

Factors that are not certain at the time you are underwriting Malone.

Aside from the things I just mentioned.

Inflation.

Changes in unemployment rates changes in car prices.

No one can accurately predict.

How those variables are going to behave over the terms of a 60 mile vulnerable. So the primary way we deal with that uncertainty as we build a significant margin of safety into our loans at the time that we originate them.

With the result, being that even if loan performance.

As.

Less than anticipated, it's still highly likely our loans are going to produce satisfactory levels of profitability.

In addition on the portfolio program, we're sharing the risk overall the dealer so we collect $100 less on alone.

80% of that is going to be borne by the dealer in the form of a reduction in dealer holdback.

Obviously that only works to a certain extent, but certainly we have a layer of protection there that is helpful.

Okay.

My other question was.

How does all of that environmental stuff impact I mean, as I said you guys just extended your warehouse and and that was wonderful to see.

But how do you think it impacts the funding environment generally I mean, we just had.

Another bank fall apart this morning and disappear.

Are you seeing.

Your funding environment change is it competitors environment is changing.

And traditionally during less terrific times four.

People's credit availability, you tend to do better so is that kind of the outlook that you still have going forward.

I think that remains to be seen.

I think the fact that.

We've shown some better growth numbers in recent periods.

Indicates that the market has gotten a bit better for us.

I do think that the.

Debt markets have reacted to.

Some of the concerns around credit quality.

Some banks are tightening credit.

Credit spreads are wider across the board.

So I think that the capital markets have reacted to it.

Hasnt impacted us yet, but hopefully it doesn't but I think.

Credit markets are certainly tighter and more expensive now than they were.

I'll say, a year or 18 months ago.

Okay. Thank you very much for your thoughts.

I thought you guys are hanging in there really well so thanks.

Thank you. Our next question is a follow up from Moshe Orenbuch with credit Suisse. Your line is open.

Yeah, Doug just two quick things first as you mentioned that GAAP and adjusted kind of assets were growing in.

The mid ones percent.

Given what youre seeing in terms of.

In terms of originations.

The pace of originations.

Sorry, I shouldn't you talked about that went into April and cash flows. If you kind of put the two of them together do you think that that number's kind of accelerating or decelerating in Q2.

Hum.

George.

Okay.

I think a lot of that I think we are.

Based on the April numbers, we should still be.

Throughout the portfolio.

The turnaround that may or may or June so I think that the <unk>.

Both in the portfolio.

Similarly, I think is just a function of.

What sort of growth we put up from this point forward.

Got you and then just a quick modeling one.

Salaries and wages I think were high I didn't get a chance to look into Q was there anything in there that we should think of as one time or is that correct.

Run rate.

Well if you are comparing.

Q1.

So Q4.

There are.

Certain expenses.

Payroll taxes and fringe benefits.

Tend to be higher in Q1 and.

Most of the increase versus Q4 was due to.

Seasonal impact.

Increase in sales commissions would be another one.

If your.

Comparing it to Q1 of last year, obviously have comparable seasonal factors that may but.

Operating expenses in Q1, this year versus Q1 last year as an increase in engineering expense.

That is likely to continue.

So it really.

On what your starting point is Moshe.

Thank you. Our next question is a follow up from Robert <unk> with Autonomous Research. Your line is open.

Hey, Doug Thanks for the follow up I, just wanted to ask about the repurchase I think in the past you've talked about when youre growing originations I won't repurchase as much and vice versa. So just curious what the appetite for share repurchases is.

Given the growth is a little slower now than it was towards the end of last year.

Mhm.

I think we continue to think about it the same way we always have.

The first priority is to make sure we have the capital we need to fund anticipated levels of loan originations.

And that obviously includes a number of.

Subjective considerations like.

What the capital markets are like what sort of bank tightening is going on regulatory matters et cetera.

But we're comfortable that we have all the capital we need to fund anticipated levels of originations.

When we go to the next step in.

If we can buy the stock for less and we think its worth with yourselves. So we're thinking about the same way we have for many many years.

Sure.

Thank you 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.

We'd like to thank everyone for their support and for joining us on our conference call today.

Do you have any additional follow up questions. Please direct them to our Investor relations mailbox at IR credit acceptance Dot com we're.

We're looking forward to talking to you again next quarter. Thank you.

Okay.

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