Q4 2023 Credit Acceptance Corp Earnings Call
Yeah.
Speaker Change: Good day, everyone and welcome to the credit acceptance Corporation fourth quarter 2023 earnings call.
Speaker Change: 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 Financial Officer, Jay Martin.
Jay Martin: Thank you.
Jay Martin: Good afternoon, and welcome to the credit acceptance Corporation fourth quarter 2023 earnings call.
Jay Martin: As you read our news release posted on the Investor Relations section of our website.
Jay Martin: Credit acceptance dotcom.
Jay Martin: As you listen to this conference call. Please recognize that both contain forward looking statements.
Jay Martin: Many of the federal Securities Law.
Jay Martin: 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.
Jay Martin: These risks and uncertainties include those spelled out in the cautionary statement regarding forward looking information included in the news release.
Jay Martin: 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.
Jay Martin: At this time I will turn the call over to our Chief Executive Officer, Ken Booth to discuss our fourth quarter results.
Ken Booth: Thanks Jay.
Our GAAP and adjusted results for the quarter include adjusted net income of $149 million, which is a 17% decrease from the fourth quarter of 2022.
Ken Booth: Adjusted earnings per share of $10, six which is a 14% decrease from the fourth quarter.
Ken Booth: In terms of collections, we had a decrease in forecasted collection rates. The decrease forecasted net cash flows from our loan portfolio by $57 million or.
Ken Booth: 0.6% compared to a decrease in working out the flex of rates during the fourth quarter of 2022 <unk>.
Ken Booth: The decrease forecast of net cash flows for our loan portfolio by $41 million or zero point Vipers.
Ken Booth: We also had forecasted profitability for consumer loans assigned in 2020 through 2022.
Ken Booth: It was lower than our estimates at December 31, 2022.
Ken Booth: Client and forecasted collection rates.
Ken Booth: The fourth quarter of 2022.
Also we had a slower forecasted net cash flow timing during 2023, primarily as a result of a decrease in consumer loan payments prepayments to below historical average levels.
Ken Booth: From a growth standpoint unit and dollar volumes grew 26, 7% and 21, 3%, respectively as compared to the fourth quarter of 2022.
Ken Booth: The average balance of our loan portfolio is now the largest it has ever been.
Ken Booth: On a GAAP and adjusted basis, it increased by 9% and 13 recoveries.
Ken Booth: 14%, respectively as compared to the fourth quarter of 2022.
Ken Booth: Our results also included an increase in initial spread.
Ken Booth: Super loan assignments to 21, 7%.
Ken Booth: Compared to 29% consumer loans assigned in the fourth quarter of 2022.
Ken Booth: And that increase.
Cost of debt, which was primarily due to higher interest rates and recently completed or extended secured financing.
Ken Booth: And the repayment of all their secured financings with lower interest rates.
Ken Booth: At this time, Doug <unk>, our Chief Treasury Officer, J, Martin and I will take your questions.
Speaker Change: Thank you, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone again to ask a question. Please press star one way one moment for our first question.
Speaker Change: Our first question comes from the line of Moshe Orenbuch of <unk>.
Speaker Change: Cowen Your line is open.
Moshe Ari Orenbuch: Great. Thanks.
Moshe Ari Orenbuch: Gentlemen, if you could just talk a little bit about the competitive environment and kind of how you see it at this stage.
Moshe Orenbuch:
Speaker Change: Reflected in the spreads.
Thank you.
Speaker Change: So we feel pretty good about the competitive environment.
Speaker Change: Volume per dealer is a good metric to reflect the intensity of the environment.
Speaker Change: Increased.
Speaker Change: Despite the increase in new dealer enrollments.
Speaker Change: Or is it going less productive received by dealers and their average is.
Speaker Change: Our overall growth rate.
Very high for the quarter and for the 30 days subsequent to year end.
Speaker Change: Yes.
Speaker Change: So January was January numbers in the release for volumes.
Speaker Change: Yes, yes, it was 21, 5% for.
Speaker Change: For the first 30 days.
Speaker Change: Thank you.
Speaker Change: At the same time interest rates have been up a lot and could you talk a little bit about how the financing. She did during Q4, a good impact interest expense.
Speaker Change: Is there a way to relate that to the amount of spread that you need to pick up and that's the answer.
Speaker Change: I mean that.
Speaker Change: The interest rate in Q4 was.
Speaker Change: Six 3% versus five 8% in Q3.
Speaker Change: That obviously doesn't.
Speaker Change: Include a full quarter of the $600 million senior note issuance.
Speaker Change: All things equal I would expect that number would be.
Speaker Change: Even higher going forward.
Speaker Change: What we try to do when we price our loans is maximize the amount of economic profit.
Speaker Change: That's economic profit for a long.
Speaker Change: Times, the number of wells.
And in doing that we consider be anticipated expenses were going to occur over the life of loan.
Speaker Change: Who the interests.
Speaker Change: Sales and marketing G&A and salaries and wages so.
Speaker Change: As.
Interest or other expenses go up.
Speaker Change: We either need to be satisfied with what will return or reduce our inventory.
Speaker Change: Net cash flows.
Speaker Change: Yeah.
Got it.
Speaker Change: You did note that there was.
Speaker Change: Another kind of <unk>.
Speaker Change: <unk>.
Speaker Change: Cash changes.
Speaker Change: In the quarter.
Speaker Change:
Speaker Change: Can you can you talk a little bit about.
Speaker Change: How that will.
Perfect.
Speaker Change: Adjusted yield.
Speaker Change: Go forward.
Speaker Change: <unk> adjusted the yield decline.
Speaker Change: The 17, 9% in Q4.
Speaker Change: 18, 5% in Q3.
Speaker Change: What happens in Q1 will be dependent on the yield on new loan originations.
Speaker Change: And oil performance in Q1.
Speaker Change: But all else equal.
Speaker Change: If nothing else changed.
Speaker Change: You would expect a decline in forecasted net cash flows in Q4.
Speaker Change: Let's put a bit of further pressure on the adjusted yield in Q1.
Again that makes some big assumptions about all else equal.
Speaker Change: Gotcha.
Speaker Change: Thanks, and then just last one for me is.
Speaker Change: Fourth quarter, we don't get the 10-Q, so it looks like you bought back.
Speaker Change: 44000 shares.
Math correct like spend the right amount.
Speaker Change: I mean, I think we bought approximately 100000 jurors map little over 100000.
Speaker Change: Got you.
Speaker Change: Okay. Thanks very much.
Speaker Change: Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone again to ask a question. Please press star one line one moment please.
Speaker Change: Our next question comes from the line of Robert Wazzock of Autonomous Research. Your line is open.
Robert Wildhack: Hey, guys.
Robert Wildhack: Question on the forecasted collections and adjusted yield as well.
Robert Wildhack: First what's what's behind the continued drop in forecasted collections is there anything specific that you would highlight there and then do you have any insight or thoughts on.
Robert Wildhack: When that could ultimately bottom.
Robert Wildhack: I mean, I think the reason for it.
Robert Wildhack: One performance being worse than initially expected as a combination of things, including the fact that those loans were originated in a very competitive period, which hurts well performance.
Those consumers enhanced vehicle would relatively peak valuations.
Robert Wildhack: The impact of inflation on the consumer.
Robert Wildhack: Has also contributed.
Speaker Change: It's impossible to say when.
Speaker Change: Loan performance will level out.
Speaker Change: If I look at the 2015 book of business.
Speaker Change:
Speaker Change: It leveled out after this point.
Speaker Change: Still declining but at a slower rate.
Speaker Change:
Speaker Change: Whether that pattern will hold true on the 'twenty two business remains to be seen but.
Speaker Change: Absolutely at some point it will level out so it's difficult to say precisely one.
Okay, and then could you speak to.
Speaker Change: The current leverage level.
Speaker Change: And your capacity to both continue to keep our to continue buying back shares and also continued growing at.
Speaker Change: This current pace. Thanks.
Our leverage on an adjusted basis is within the historical range.
Speaker Change: So we're very comfortable with where we are today.
Speaker Change: Obviously, our GAAP leverage is different.
Speaker Change: And.
Speaker Change: So apples to oranges comparison of <unk>.
Speaker Change: <unk> 2020 to todays leverage.
Speaker Change: But on a consistently applied basis, our leverages within the historical norm.
Speaker Change: The way, we think about buybacks as our first priority is always to make sure that we have the capital we need to fund anticipated levels of all originations.
So what that means is growing faster all else equal we we buy back stock that doesn't mean, we don't Miami.
Speaker Change: But it means we buyback glass.
Speaker Change: Okay. Thanks, Doug.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Bob Please.
Speaker Change: Our next question comes from the line of Vincent.
Vincent: Pancake of Stephens Your line is open.
Vincent: Hi, good afternoon, thanks for taking my questions.
Vincent: First one so you've highlighted that the.
Vincent: The average loan balance.
Vincent: Hi suspended the long terms have also been increasing just wondering.
Vincent: If you're kind of comfortable with those ranges can you take them higher and.
Vincent: If there are any other adjustments.
Vincent: You are thinking about when you think about underwriting thank you.
Vincent: I mean, the consumer loan balance.
Operator: Good day, everyone, and welcome to the Credit Acceptance Corporation fourth quarter 2023 earnings call. Today's call is being, A webcast and transcript of today's earnings call will be made available on Credit Acceptance's website. At this time, I would like to turn the call over to Credit Acceptance's Chief Financial Officer, Jay Martin. Thank you.
Vincent: It was.
Vincent: Pretty flat on a year over year basis.
Vincent: <unk> was up a month.
Vincent: So I don't think theres been a dramatic change over the last couple of years.
Vincent: Okay.
Jay Martin: Good afternoon, and welcome to the Credit Acceptance Corporation fourth quarter 2023 earnings call. You can read our news release posted on the Investor Relations section of our website at ir.creditacceptance.com. If you listened to this conference call, please recognize that both contain forward-looking statements within the meaning of federal securities laws. 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 those projected. These risks and uncertainties include those spelled out in the cautionary statement regarding forward-looking information included in this news report. Consider all forward-looking statements in light of those risks and uncertainties.
Speaker Change: Thank you for that and then.
Speaker Change: On.
Speaker Change: For the forecasted collections I'm wondering if there's any more.
Speaker Change: Macro assumptions that are baked into there.
Speaker Change: No I guess the for instance.
Speaker Change: Manheim index with used car sales and used car prices or.
Speaker Change: Rate cuts or anything like that I don't know if that has any influence on your.
But in forecasted collections I think about that.
Speaker Change: We don't include macro variables like unemployment rates or inflation rates are GDP or anything like that.
Speaker Change: We do have.
Speaker Change: Depreciation curve that we ended up using.
Speaker Change: To model.
Speaker Change: Our cast the collection rates so.
Jay Martin: Additionally, I should mention that to comply with the SEC's Regulation G, please refer to the Financial Results section of our newsroom, which provides tables showing how non-GAAP majors reconcile to GAAP majors. At this time, I will turn the call over to our Chief Executive Officer, Ken Booth, to discuss our fourth quarter results. Thanks, guys.
Speaker Change: That's factored in.
Speaker Change: But no one really knows.
Speaker Change: What.
Speaker Change: Is going to happen.
Speaker Change: Used vehicle prices over a 60 month, Poland, Germany.
Speaker Change: So the way that we deal with uncertainty associated with used car prices and all the other uncertainties is just by building up a pretty significant margin of safety.
Ken Booth: Our GAAP and Adjusted Results for the quarter include adjusted net income of $129 million, which is a 17% decrease from the fourth quarter of 2020; adjusted earnings per share of $10.06, which is a 14% decrease from the fourth quarter. In terms of collections, we had a decrease in forecasted collection rates. The Decreased Forecasted Net Cash Flows for our Loan Portfolio by $57 million, or 0.6%? compared to a decrease in forecasted collection rates during the fourth quarter of 2022. The decreased forecasted net cash flows from our loan portfolio by $41 million, or 0.5. We also had forecasted profitability for consumer loans assigned in 2020 through 2022 that was lower than our estimates at December 31, 2022 due to a decline in forecasted collection rates since the fourth quarter of 2022.
Speaker Change: Into our loan pricing when Theyre originated.
We do that so you've got a flow performance was worse than expected.
Speaker Change: Our loans are still likely to produce satisfactory levels of profitability.
Speaker Change: Okay. Thank you and last one for me so I understand you have that.
Speaker Change: Forecast collections.
Speaker Change: Maybe change underwriting.
So variables to get your desired results.
Speaker Change: When do you think about the consumer that you are lending too just if you can.
Speaker Change: If you have any views about how that consumer health is doing our trends getting better.
Speaker Change: As you are all over the past couple of quarters. Thank you.
It's pretty early to say.
Speaker Change: But for the 2000.
Speaker Change: 23 loans are performing better at the same age than the 2022 loans were.
Ken Booth: Also, we have slower forecasts of net cash flow timing during 2023, primarily as a result of a decrease in consumer loan prepayments to below historical average levels. From a growth standpoint, unit and dollar volumes grew 26.7% and 21.3%, respectively, as compared to the fourth quarter of 2022. The average balance of our loan portfolio is now the largest it has ever been.
Speaker Change: No.
Speaker Change: But again that book of business.
Really isn't all that season.
Speaker Change: <unk>.
Speaker Change: We have made adjustments.
Speaker Change: <unk> seen the underperformance of the 'twenty, one and 'twenty two loans.
Speaker Change: We've incorporated.
Speaker Change: We're always making changes to our forecast based on recent trends in all performance.
So we have made adjustments to our forecast there, but I think it's too early to have a.
Ken Booth: On an adjusted basis, it increased by 9% and 13%, respectively, as compared to the fourth quarter of 2022. Our results also included an increase in the initial spread on consumer loan assignments to 21.7%, compared to 20.9%, and Consumer Loan was signed in the fourth quarter of 2022, and an increase in our average cost of debt, which was primarily due to higher interest rates on recently completed or extended secured financing and the repayment of older secured financings with lower interest. At this time, Doug Busk, our Chief Treasury Officer, Jay Martin, and I will take your questions. Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star 1-1 on your telephone.
Speaker Change: Allusive comment on consumer health.
Speaker Change: Okay.
Speaker Change: Thank you.
With no further question in the queue I would like to turn the call back over to Mr. Martin for any additional or closing remarks.
Martin: We would like to thank everyone for their support and for joining US on the 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.
Mr. Martin: We look forward to talking to you again next quarter. Thank you.
Mr. Martin: Once again this does conclude today's conference we thank you for your participation.
Moshe Ari Orenbuch: Again, to ask a question, please press star 1-1. One moment for our first question. Our first question comes from the line of Moshe Orenbuch, of TD Cowley, Alon Hooper, you know, reflected in the spreads that, you know, that you're seeing. Well, we feel pretty good about the competitive environment. Volume for Beeler is a good metric to reflect the intensity of the environment.
Mr. Martin: Okay.
Mr. Martin: [music].
Mr. Martin: Okay.
Mr. Martin: [music].
Ken Booth: You know, it increased despite the increase in new dealer enrollments, you know, new dealers are generally less productive this season than dealers, and that is just our overall growth rate was very high for the quarter and for the 30 days subsequent year-end. Yeah, I didn't see the January numbers. Were the January numbers in the release for volumes? Yes, yes, it was 21 and a half percent for the first 30 days. But at the same time, interest rates have been up a lot, and could you talk a little bit about how the financings you did during Q4 are going to impact interest expense, and is there a way to relate that to the amount of spread that you need to pick up to offset that? I mean, you know, the interest rate in Q4 was 6.3%, you know, versus 5.8% in Q3. That obviously doesn't include a full quarter of the $600 million senior note issuance. So, all things equal, I would expect that number to be even higher going forward. Bye!
Ken Booth: What we try to do when we price our loans is maximize the amount of economic profit. That's economic profit for Wallen times the number of walls. And in doing that, we consider the anticipated expenses that are going to occur over the life of the loan, including interest, sales, and marketing, G&A, and salaries and wages.
Ken Booth: So, and interest or other expenses go up, we either need to be satisfied with the low rate of return or reduce our savings results because it's a spectated net cash flow. Got it. And you did note that there was, you know, another kind of write-down for forecast changes in the quarter. Can you talk a little bit about how that will affect the adjusted yield as we go forward? I mean, the adjusted yield declined to 17.9% in Q4, from 18.5% in Q3. What happens in Q1 will be dependent on the yield on new loan originations and loan performance in Q1, but all will be cool. If nothing else changed, you would expect a decline in forecasted net cash flows in Q4 to put a bit of further pressure on the adjusted yield in Q1. But again, that makes some big assumptions about all else being equal. Got you. Thanks. And then just the last one for me is, you know, fourth quarter; we don't get the 10-Q.
Ken Booth: So it looks like you brought back 44,000 shares. Is that the correct math? Like, is that the right amount?
Ken Booth: I mean, I think we bought approximately 100,000 shares back, a little over 100,000. Gotcha. Thanks very much.
Operator: Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 1-1 on your telephone. Again, to ask a question, please press star 1-1. One moment.
Operator: Our next question comes from the line of Robert Wildhack of Autonomous Research, a lot of Hey guys, a question on the forecasted collections and adjusted yield as well. First, what's behind the continued drop in forecasted collections? Is there anything specific that you'd highlight there?
Ken Booth: And then do you have any insight or thoughts on when that could ultimately bottom? I mean, I think the reason for the loan performance being worse than initially expected is a combination of things, including the fact that those loans were originated in a very competitive period, which hurts loan performance. Those consumers finance vehicles at relatively peak valuations. I think the impact of inflation on the consumer has also contributed.
Ken Booth: It's impossible to say when. You know, all performance will level out. If I look at the 2015 book of business, it leveled out after this point. I mean, it still declined but at a slower rate. Whether that pattern will hold true on the 22 business remains to be seen. But, you know, absolutely, at some point, it'll level out. It's just difficult to say precisely when.
Ken Booth: Okay, and then could you speak to the current leverage level and your capacity to both continue to keep, or to continue buying back shares and also continue growing at this current pace? Thanks. Our leverage on an adjusted basis is within the historical range, so we're very comfortable with where we are today. Obviously, our gap leverage is different, and you know it's an apples-to-oranges comparison of pre-2020 to today's leverage. But on a consistently applied basis, our leverage is within the historical norm. The way we think about buybacks, our first priority is always to make sure that we have the capital that we need to fund anticipated levels of loan originations.
Ken Booth: So, you know, what that means is we're growing faster, and all else equal, we buy back less stock. That doesn't mean we don't buy any, but it means we buy back less. Okay, thanks, bud. Thank you. One moment, please. Our next question comes from the line of Vincent Caintic. Thank you.
Vincent Caintic: Thanks for taking my questions. First one, you highlighted that the average loan balance, as high as it's been in the long term, has also been increasing. I'm just wondering if you're kind of comfortable with those ranges.
Ken Booth: Can you take them higher and if there are any other adjustments that you are thinking about when you think about underwriting? Thank you. I mean, the consumer loan balance was pretty flat on a year-over-year basis, and the loan term was up a month. So I don't think there's been, you know, a dramatic change over the last couple of years.
Ken Booth: Okay, thank you for that. And then... on to, um, the forecasted collections. I'm wondering if there are any, um, macro assumptions that are baked into their, um, I guess the Mannheim index with used car sales and used car prices or fed rate cuts or anything like that. I don't know if that has any influence on, on his forecasted collections. If you could talk about that, I would appreciate it. We don't include macro variables like unemployment rates or inflation rates or GDP or anything like that.
Ken Booth: You know, we do have a depreciation curve that we end up using to model, you know, forecasted collection rates. So that's factored in. But no one really knows what is going to happen to used vehicle prices over a 60-month loan term. So the way that we deal with uncertainty associated with used car prices and all the other uncertainties is just by building up a pretty significant margin of safety into our loan pricing when they're originated. We do that so even if loan performance is worse than expected, our loans are still likely to produce satisfactory levels of profitability. Okay. Thank you. And last one for me, so I understand you have the... forecast collections and maybe change underwriting or change some variables to get to your desired results.
Ken Booth: But when you think about the consumer that you're lending to, if you have any views about how that consumer health is doing, are trends getting better? As you say, it's pretty early to say. 23 loans are performing better at the same age than the 2022 loans were. But again, that book of business, you know, really isn't all that seasoned.
Ken Booth: We have made adjustments, you know, as we've seen the underperformance of the 21 and 22 loans. We've incorporated it. You know, we're always making changes to our forecast based on recent trends and old performance. So we have made adjustments to our forecast there. But I think it's too early to have a conclusive comment on consumer health.
Jay Martin: Okay, cool. Thank you. With no further questions in the queue, I would like to turn the call back over to Mr. Martin for any additional or closing remarks. We would like to thank everyone for their support and for joining us on the conference call today. If you have any additional follow-up questions, please direct them to our Investor Relations mailbox at ir at creditacceptance.com. We look forward to talking to you again next quarter. Once again, this does conclude today's conference. We thank you for your participation. Thanks for watching!