Credit Acceptance Q4 2023 Earnings Call Transcript

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January 31, 2024

Key Takeaways

  • Credit Acceptance reported Q4 adjusted net income of $129 million (down 17% YoY) and adjusted EPS of $10.06 (down 14% YoY).
  • A decline in forecasted collection rates cut projected net cash flows by $57 million (0.6%), contributing to a drop in adjusted loan yield to 17.9%.
  • Loan originations remained strong with unit volumes up 26.7% and dollar volumes up 21.3% year-over-year, driving the portfolio to its largest ever average balance (GAAP +9%, adjusted +13%).
  • Initial loan spreads rose to 21.7% (from 20.9%), but average cost of debt climbed to 6.3% due to higher rates on new and extended financings.
  • Credit performance on 2020–22 loans weakened—attributed to peak vehicle values and inflation—while early 2023 vintages are trending better; stability timing remains uncertain.
AI Generated. May Contain Errors.
Earnings Conference Call
Credit Acceptance Q4 2023
00:00 / 00:00

There are 7 speakers on the call.

Operator

Good day, everyone, and welcome to the Credit Acceptance Corporation 4th 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 Financial Officer, Jay Martin.

Speaker 1

Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation 4th Quarter 2023 Earnings Call. As you read our news release posted on the Investor Relations section of our website at ir.creditacceptance.com, 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 regarding forward looking information included in the news release. Consider all forward looking statements in light of those and other risks and uncertainties.

Speaker 1

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. At this time, I will turn the call over to our Chief Executive Officer, Ken Booth, discuss our Q4 results.

Speaker 2

Thanks, Jay. Our GAAP and adjusted results for the quarter include Adjusted net income of $129,000,000 which is a 17% decrease from the Q4 of 2022. Adjusted earnings per share of $10.06 which is a 14% decrease from the Q4 of 2022. In terms of collections, we had a decrease in forecasted collection rates that decreased forecasted net cash flows for our loan portfolio by $57,000,000 or 0.6 percent compared to a decrease in forecasted collection rates during the Q4 of 2022 The decrease forecasted net cash flows from our loan portfolio by $41,000,000 or 0.5%. We also had forecasted profitability for consumer loans assigned in 2020 through 2022 that was lower than our estimates December 31, 2022 due to a decline in forecasted collection rates since the Q4 of 2022.

Speaker 2

Also, we had 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. From a growth standpoint, unit and dollar volumes grew 26.7% and 21.3% respectively as compared to the Q4 of 2022. The average balance of our loan portfolio is now the largest that has ever been. On a GAAP on adjusted basis, it increased by 9% and 13%, respectively, as compared to the Q4 of 2022. Our results also included an increase in the initial spread and consumer loan assignments to 21.7% compared to 20.9% and consumer loans assigned in the Q4 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 rates.

Speaker 2

At this time, Doug Busk, our Chief Treasury Officer, Jay Martin and I will take your questions.

Operator

Thank you. Our first question comes from the line of Moshe Orenbuch of TD Cowen. Your line is now open.

Speaker 3

Great, thanks. Gentlemen, if you could just talk a little bit about the competitive environment and kind of how you see it at this stage reflected in the spreads that you're seeing? Thank you.

Speaker 2

We feel pretty good about the competitive environment. Volume per dealer is a good metric to reflect the intensity of the environment. It increased despite the increase in new dealer enrollments, new dealers are generally less productive Preseason dealers. And that is just our overall growth rate was very high for the quarter and for the 30 days Subsequent year end.

Speaker 3

Yes. I didn't see the January was were the January numbers in the release for volumes?

Speaker 2

Yes. Yes, it was 21.5%

Speaker 4

For the 1st 30 days. Thank you.

Speaker 3

At the same time, interest rates have been up a lot. And Can 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?

Speaker 4

I mean the interest rate in Q4 was 6.3% versus 5.8% in Q3. That obviously doesn't include a full quarter of the $600,000,000 senior note issuance. So all things equal, I always thought that number would be even higher going forward. What we try to do when we price our loans is maximize the amount of economic profit. That's economic profit for loans times the number of loans.

Speaker 4

And In doing that, we consider the anticipated expenses we're going to incur over the life of the loan, including interest, Sales and marketing, G and A and salaries and wages. So as interest or other expenses go up, We either need to be satisfied with the lower return or reduce our expense ratio to the anticipated net cash flows.

Speaker 3

Got it. And you did note that there was 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?

Speaker 4

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 else equal, if nothing else changed, you would expect a decline in forecasted net cash flows in Q4 or it's put a bit of further pressure on the adjusted yield in Q1. But again, that makes some big assumptions about all else equal.

Speaker 3

Got you. Thanks. And then just last one for me is, Q4, we don't get the 10 Q. So it looks like you bought back 44,000 shares. Is that Math correct?

Speaker 3

Like is that the right amount?

Speaker 2

I mean,

Speaker 4

I think we bought approximately 100,000 shares back, a little over 100,000.

Speaker 3

Got you. Okay. Thanks very much.

Operator

Thank you. Our next question comes from the line of Robert Wildhack of Autonomous Research. Your line is open.

Speaker 5

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? And then do you have any insight or thoughts on when that could ultimately bottom?

Speaker 4

I mean, I think it's 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 period with Hertzwell performance, those consumers financed vehicles at relatively peak valuations. I think the impact of inflation on the consumer has also contributed. It's impossible to say when loan performance will level out. If I look at the 2015 book of business, it leveled out after this point. I mean, it's still declined, but at a slower rate.

Speaker 4

Whether that pattern will hold true on the 'twenty two business remains to be seen. But absolutely, at some point, it will level out. It's just difficult to say precisely when.

Speaker 5

Okay. And then could you just 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.

Speaker 4

Our leverage on an adjusted basis is within the historical range. So we're very comfortable with where we are today. Obviously, our GAAP leverage is different. And it's an apples to oranges comparison of pre-twenty 20 to today's leverage. But on a consistently applied basis, our leverage is within the historical norm.

Speaker 4

The way we think about buybacks is our first priority is always to make sure that we have the capital that we need to fund anticipated levels of loan originations. So what that means is we're growing faster. All else equal, we buy back less stock. That doesn't mean we don't buy any, but it means we buy back less.

Speaker 6

Okay. Thanks, Ben.

Operator

Thank you. One moment, please. Our next question comes from the line of Vincent Caintic of Stephens. Your line is open.

Speaker 6

Hi, good afternoon. Thanks for taking my questions. First one, so you highlighted that the average loan balance As the high to spend and the loan terms have also been increasing. Just wondering, if you're kind of comfortable with those ranges, can you take them higher? And if there are any other adjustments that you are thinking about when you think about underwriting?

Speaker 6

Thank you.

Speaker 4

I mean the consumer loan balance was pretty flat on a year over year basis. Loan churn was up a month. So I don't think there's been dramatic change over the last couple of years.

Speaker 6

Okay. Thank you for that. And then on for the forecasted collections, I'm wondering if there's any macro assumptions that are baked into there. I guess the for instance, the Manheim 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 your forecasted collections, if you could help with that.

Speaker 4

We don't include macro variables like unemployment rates or inflation rates or GDP or anything like that. We do have a Depreciation curve that we end up using to model 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 pretty significant margin of safety into our loan pricing when they're originated.

Speaker 4

We do that. So even if loan performance is worse than expected, our loans are still likely to produce that effective levels of profitability.

Speaker 6

Okay. Thank you. And last one for me. So I understand you have the You forecast collections and maybe you change underwriting or change some variables to get to your desired results. But When you think about the consumer that you're lending to, just if you can if you have any views about how that consumer health is doing?

Speaker 6

Are trends getting better over the past couple of quarters? Thank you.

Speaker 4

It's pretty early to say. Thus far the 20 23 loans are performing better at the same age than the 2022 loans were. But again, that book of business really isn't all that season. We have made adjustments As we've seen the underperformance of the 2021 and 2022 loans, we've incorporated We're always making changes to our forecast based on recent trends of loan performance. So we have made adjustments to our forecast there.

Speaker 4

But Like it's too early to have a preclusive comment on consumer health.

Speaker 6

Okay,

Operator

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.

Speaker 1

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 ircreditacceptance.com. We look forward to talking to you again next quarter. Thank you.

Operator

Once again, this does conclude today's conference. We thank you for your participation.

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