Q2 2023 Credit Acceptance Corporation Earnings Call

Good day, everyone and welcome to the credit acceptance Corporation second quarter 2023 earnings call. Today's call is being recorded a 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 Chief Treasury Officer, Doug Busk.

Thank you good afternoon, and welcome to the credit acceptance Corporation second quarter 2023 legs.

If you read our news release.

Relations section of our website.

Got it.

Dot com and as you.

Also this conference call. Please recognize that forward looking statements.

Getting a federal Securities law.

These forward looking statements are subject to a number of risks and uncertainties.

Which are beyond our control.

Okay.

Which could cause actual results.

Such statements.

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

The news release.

Consider all forward looking statements.

Other risks and uncertainties.

Additionally, I should mention that to comply with the SEC's regulation G.

Please refer to financial results section of our news release, which provides tables showing all non-GAAP measures reconcile to GAAP measures.

Our GAAP and adjusted results for the quarter include the <unk>.

Decrease in forecasted collection rates, which decreased forecasted net cash flows by $89 million or so.

0.9% compared to a decrease in forecasted collection rates during the second quarter of 2022.

Decreased forecasted net cash flow by $43 million or 0.5%.

The $89 million decrease this quarter included the impact of an adjustment to our forecasting methodology.

Which decreased our estimate by $45 million.

0.5%.

In addition, forecasted net cash flow timing slowed primarily as a result of a decrease in consumer loan repayments to below average levels.

Changes in the amount or timing of forecasted net cash flows are recognized in our GAAP results in the period of change to your provision for credit losses.

Adjusted results perspective.

All of the remaining forecast period loans through finance charges.

Unit and dollar volumes grew 12, 8% of eight 3% respectively.

Third in the second quarter of 2022.

The average balance of our loan portfolio, our GAAP and adjusted basis increased four 3% and eight 6%, respectively as compared to the second quarter of 2022.

The initial spread on consumer loans assigned increased to 21, 2% compared to 20% on consumer loans assigned in the second quarter of 2022.

Adjusted net income decreased 26% second quarter of 2000 $22 million to $140 million.

Adjusted earnings per share decreased 23%.

First quarter of 2022 to $10 69.

At this time, Ken Booth, our Chief Executive Officer, Jay Barton, Our senior Vice President Finance and accounting.

I will take your questions.

Thank you.

If you'd like to have.

Ask a question. Please press star one on your phone.

Once again Thats star one to one and two.

I draw a question press Star one again.

One moment for our first question.

Yes.

Our first question comes from the line of our June to Tetra.

Jarislowsky Fraser your line is open.

Hey, Ken.

You assumed the CEO position approximately two years ago.

Could you discuss a couple of things.

Firstly, what has been your strategic focus during the past two years.

And second.

What are your expectations regarding your areas of focus for the upcoming years.

Yes.

Yes.

Right.

Our long term strategy here really is this.

It's been the same as it was even before I took over and all we're trying to build a better business. We're trying to increase the intrinsic value when we do that really by.

It's been growing our dealer base and our loan.

Yes.

And doing that in a way that we get an acceptable return on those loans.

I wouldn't say much has changed.

Obviously different strategies that we use to try to do that I'm not going to be the lender of the export strategy, we use but ultimately.

The same thing we've been trying to do for a number of years here.

I agree.

I'm just thinking that correct.

Correct, leaving a new coming on.

Some changes maybe culture, New York strategically or do you think kind of nothing else.

And you're worried about something more than technology.

We're trying to do some things to make our products more valuable.

So the dealers.

And the consumers.

Yeah.

Right now we're in the investment stage, some macros show generate returns on that yet we're up into the future.

That's probably one of the bigger fans of Mcdonough.

And the.

Technology.

Okay. Thank you.

One moment for our next question.

Our next question comes from the line.

John Rowan from Janney Montgomery Scott Your line is open.

Good evening.

Hello can you guys discuss a little bit more than just what the change in forecasting methodology means.

Trying to get a handle on if it's just a change in the.

And the slope of the collection curve or if it's.

Something else that you know.

Is away from the historical model.

Yes.

Change to the absolute amount of forecasted collections was really due to us incorporating more recent loan performance data.

Okay.

We're always looking at the historical performance loans with similar attributes.

This quarter, we updated our forecast enhancement.

No.

Hi.

Including in that more recent loan performance data.

Okay. So there was like no like real wholesale shift though.

No I don't think so.

Similar methodology.

Updated data.

Okay, and then I guess, just kind of trying to read between the lines you talked about some collections being below average I mean, where are the loans walk now would you consider kind of the cash that you are looking to come out of the portfolios.

Reverting to the mean over time in the car.

The current marks are below average I'm just trying to understand if you were being cautious enough previously and how cautious you are going forward are you below historical averages now on the portfolio marks going forward.

Well I think we use the term below average relative to prepayment rates.

That's another thing that happened during the quarter the timing of our collections.

Forward.

It was really just due to.

Continued decline in prepayment rates prepayment rates in fact.

The quarter well below the historical average.

The word.

Although average really relates to the timing of the cash flows.

The absolute amount.

I will say.

Every quarter.

Try to put our best estimate on it.

And so I think.

Forecasted cash flows.

But we have on the books at June 30 is our best estimate of what's ultimately going to transpire.

Okay, and then just to touch on the competitive environment a little bit.

So hoping you guys would kind of talk a little bit about that.

What youre seeing out of the smaller competitors in your space are the retrenching.

Again, I want to go down market a little bit here.

With the guys that you compete with.

How is their funding looking and I'm just trying to understand.

Where you said.

And competitively speaking.

The.

The market for.

Used vehicles from enhanced subprime consumers.

Is very large and very fragmented.

The top five industry participants account for maybe 25% of the business with top 20 somewhere around 50%, but the other 50% consistent hundreds if not thousands.

We're upwards.

So I.

I don't really know.

Terribly insightful observations about what's happening at any individual competitor.

Thank you.

Still fair to say.

Competitive environment is more favorable and awards.

12, or 15 months ago.

Okay.

Alright Thats it for me thank you.

Sure.

One moment for our next question.

Our next question comes from the line of Robert <unk> from Autonomous Research. Your line is open.

Hi, guys Scott just on that last point when you say the competitive environment is more favorable than it was 12 or 15 months ago that means more favorable I E better for credit acceptance.

Correct.

Okay great.

Great and then.

I wanted to ask about the 2022 vintage.

Expected collections, there now three two percentage points below the initial forecast switches.

A very significant delta for you historically.

So what is it about that vintage that's performing so poorly.

Well I mean.

Simply put the loans.

Performing worse than loans with similar characteristics have historically.

What we saw this quarter is a continuation of the trends that we observed in the last three quarters of 2022.

We didn't see that trend in the first quarter.

It's difficult to say why it could be.

<unk> season.

Seasonal factors that occurred during tax season.

But its a continuation of a trend.

What we saw for most of 2022.

It's impossible to say exactly why this has occurred but.

Due to a few factors.

The early 'twenty two loans were originated in a pretty intense competitive environment, which generally hertzel performance.

We've seen some decline in used car prices.

And as we know I think the inflation, although it has moderated.

Has an impact on the subprime consumer so I think that all of those things are probably.

Contributing to the relatively poor performance that we've seen on the 'twenty two originations.

Sorry, just one more if I could.

The provision for new loans.

And this quarter was less than $1000 per unit and that's the second quarter in a row, where that's been pretty low historically, because I think it's usually like 1300 Fortune 500, and does that mean, you've tightened the underwriting criteria at all.

Not just due to the mechanics of the calculation.

So what drives the.

Upfront provision.

Difference between the contractual of expected yield so we expect that yield would be what we expect to earn based on the forecast the cash flows at origination the contractual yield.

It's just what the yield would be if the customer who made all the payments on time.

We have seen.

Higher initial spread on the recent loan originations, which is reduce the difference between the contractual and expected yield.

Thats resulted in up.

Decline.

Provision that we recorded when we originate a loan.

A bit of a mechanical answer.

Okay, and lowered difference between contractual and expected equals a lower provision all else equal.

That's correct.

Okay. Thank you.

On women's foreign next question.

Yes.

Our next question comes from the line of Vincent <unk> from Stephens.

And as open.

Hey, good afternoon, thanks for taking my questions.

First one on debt.

Prepayment rates on the.

The change.

<unk> there.

I guess you highlighted that.

The.

It has to do primarily with the timing of the cash flows and not the change in the absolute amount I would think that.

Lower prepayment speeds may be a positive in the sense that if the loan last for longer youre able to charge.

And the more you're able to get more interest income and so there might be a higher lifetime value to that to that loan and just curious how that works.

Your thoughts on that and how that maybe it works mechanically where maybe you are collecting more interest income but.

But your forecast collections comes down thank you.

Yes.

That may in fact occur where.

Loan doesn't prepay you end up collecting more video otherwise would because generally the people, but prepay here are the ones that work.

Are we likely to repay their loans in full anyway I E. There are the more credit worthy customers.

But it will be.

The amount of the provision is the amount required to do to reduce the net asset value. So gross loan loss allowance for credit losses to the <unk>.

Discounted value of future net cash flows so collection sort dealer holdback and that discount rate is.

In the neighborhood of 20%.

If you have a law.

Longer stream of cash flows and you're discounting it back at 20%, it's easy to see how that could result.

An increase in provision even F on certain loans that you might be forecasting.

More total collections.

Okay. Okay. That's helpful and illustrates the timing differences so I appreciate that.

Second question on <unk>.

The spreads are the yields in terms of your thought.

A bit earlier about competitive.

Leaving a bit.

Are you able to talk about the pricing that youre able to charge the consumer any change on that in terms of improved spreads.

I mean, we don't really price our product library, the interest rate on our retail installment contract with the consumer.

We price our product.

Maximize the amount of economic profit number of loans originated so economic profit per load times, the number of loans we originate.

Obviously, one of the things that determine the amount of economic profit per loan is just the relationship between what we expect to collect what we pay for below at origination.

So as you can see we are a little higher initial spreads this year that we had.

Last year, but.

All of that.

We're pricing to maximize economic profit reserves.

A lot of things that go into that including our cost of capital and timing of the cash flows of expenses and things like that.

Okay.

Then last one for me.

Thank you see the active dealer counts and the activity growing year over year.

Anything you can share in terms of the discussions youre, having with your dealer customers.

In terms of maybe what might be driving the increased engagement and increased.

Volume Youre getting from the dealers.

Yes, I mean I think that's.

The competitive environment that I mentioned earlier.

Likely has something to do with it.

I think the fact that we're.

Originating more higher quality loans.

Has something to do with it as well.

Well.

So I think it's fair to say that.

Increase.

Dealers.

<unk> has increased over the course of the last 12 months.

<unk>.

I think that's primarily due to those two factors.

Okay, Great. That's helpful. Thanks very much.

Got it.

Thank you.

As a reminder to ask a question Thats Star 111.

Start 111 moment, our next question.

Our next question comes from the line of Ray Cheesman.

And <unk> capital management your line is open.

Doug when you just mentioned a minute ago.

Quality loans does the better competitive environment referenced earlier.

You get more volume at let's call. It a static FICO score or has it allowed you to actually move up market slightly while maintaining your economics.

Yeah.

I mean thats a complicated question, especially after three years of the pandemic.

We are originating a higher.

Credit score customer.

Part of that is due to the.

The fact that elevated used car prices and inventory shortages.

Have caused it to be very difficult for the deeper subprime consumer.

The purchase of vehicle with certain.

Certain respects so we've seen.

The increase in the credit quality of.

Kind of our bread and butter business, if you will.

Due to that phenomenon.

All of those returns are expected to be consistent with.

What we.

Where do you expect that five years ago or so.

The other thing Thats contributing to an increase in.

Credit quality is we've intentionally rolled out a program.

Targeted ads.

A little higher credit quality borrowers.

The idea of between that program.

As to provide us with <unk>.

Incremental volume now that incremental volumes at a return.

Yes.

Somewhat lower than our.

Rather than butter business, but still above our cost of capital I mean thats conceptual.

Thinking behind that obviously, whether those statements about returns are not proved to be true will be dependent on loan performance.

Along the same lines.

I believe I saw in the press release that it said that when consumer credit tightens prepayments slow and then we also have the phenomena that the 22 class was the last group that bought with.

The 68% used car value surge that gets talked about in the press a lot and now of course, that's rolling over.

When you say that you updated for your loan assumptions during the quarter.

Guessing those were some of the things you took into account so that we shouldnt see another one of those and say Q3 or Q4 or or.

Kind of Rejigger rethink things every single quarter, you said you make your best guess.

Yes.

We think we've put our best guess forward here.

We're.

Like I said, we're using more recent loan performance data.

We're comfortable with our forecast.

But.

If you look at our track record or network appropriately accurate.

<unk> performed better than expected and some report worse so.

It will.

Periodically.

Adjust our models and update our assumptions, but we're putting our best foot forward here.

Can I ask just one more.

Do you guys do.

Electric vehicles.

Or have any plans to.

We do electric vehicles.

Not a significant amount of AUM in the chief barrier there is just price.

Yes.

Great affordability issues.

Our target customer.

Okay. Thank you very much Doug.

You bet.

Thank you.

And 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 would like to thank everyone for their support and for joining us on our conference call today.

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.

Have a great day.

Okay.

[music].

Okay.