Credit Acceptance Q3 2024 Earnings Call Transcript

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October 31, 2024

There are 8 speakers on the call.

Operator

Good day, everyone, and welcome to the Credit Acceptance Corporation's 3rd Quarter 2024 Earnings Call. Today's call is being recorded. A webcast and transcript of today's earnings call will be made available on Credit Acceptance's website.

Speaker 1

At this

Operator

time, I would like to turn the call over to Credit Acceptance Chief Financial Officer, Jay Martin.

Speaker 1

Thank you. Good morning and welcome to the Credit Acceptance Corporation Q3 2024 Earnings Call. As you read our news release posted on the Investor Relations section of our website at ir.creditacceptance.com And 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 materially from such statements. These risks and uncertainties include those spelled out in the cautionary statement regarding forward looking information included in the news release.

Speaker 1

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. At this time, I will turn the call over to our Chief Executive Officer, Ken Booth to discuss the Q3 results. Thanks, Jay. Overall, we had another mixed quarter as it relates to collections and originations, 2 key drivers of our business.

Speaker 1

Our 2022 vintage continued to underperform our expectations and 2021, 2023 and 2024 also declined. Overall, a modest decline of 0.6 percent or $62,800,000 in forecasted net cash flows. As we have previously communicated, historically our models were very good at predicting loan performance in aggregate, but our models worked best during less volatile times. The pandemic and its ripple effects created volatile conditions, federal stimulus, enhanced unemployment benefits and supply chain disruptions led to vehicle shortages, inflation, etcetera, all of which impacted competitive conditions. We've had larger than average forecast misses, both high and low during this volatile period.

Speaker 1

But because we understand forecast and collection rates is challenging, our business model is designed to produce acceptable returns in the aggregate even if loan performance is less than forecasted. Despite the decline in forecasted collections this quarter, we believe we will continue to produce substantial economic profit per share in the future. Given our worst vintage 2022 is still forecasted to produce economic profit. And as I explained in the past, we are less reactive to changes in competitive economic cycles and others in the industry because we take a long view in the industry, we price to maximize economic profit over the long term and seek the best position in the company if access to capital becomes limited. Ultimately, we are happy with the discipline to maintain underwriting standards during the easy money times of 2021 and especially 2022.

Speaker 1

While our market share was lower during those years, we believe this puts us in a better position to take advantage of more favorable market conditions today. During the quarter, we experienced strong growth that had our highest Q3 unit and dollar volume ever, growing our loan unit and dollar volume by 17.7% and 12.2%, respectively. This is our 9th quarter in a row with double digit unit volume growth. Our loan portfolio is now at a new record high of $8,900,000,000 on an adjusted basis, up 18.6% from Q3 2023. Our market share in our core segment was 6.2% as of August 31, 2024.

Speaker 1

Our growth did slow during the quarter, likely impacted by our Q2 forecast changes that resulted in lower advance rates during Q3. Beyond these 2 key drivers, we continue making progress during the quarter towards our mission of creating intrinsic value and positively changing the lives of our 5 key constituents: dealers, consumers, team members, investors and the communities we operate in. We do this by providing a valuable product that enables dealers to sell to consumers regardless of their credit history. This allows dealers to make incremental sales for roughly 55 percent of adults with other than prime credit. For these adults, it enables them to obtain a vehicle to get to their jobs, take their kids to school, etcetera.

Speaker 1

It also gives them the opportunity to improve or build their credit. We recognize that it's been a challenging time for our consumers impacted by recent hurricanes. As we have for many years, we are working with these consumers, including suspending some of our collection efforts to allow these customers to prioritize their safety and most urgent needs. During the quarter, we financed 95,670 contracts for our dealers and consumers. We collected $1,300,000,000 overall and paid $71,000,000 in portfolio profit and portfolio profit expressed to our dealers.

Speaker 1

We added 1038 new dealers for the quarter and now have our largest number of active dealers ever for our Q3 with 10,678 dealers. From an initiative perspective, we are committed to improvements through our go to market approach aimed at providing product innovation and support to our dealers faster and more effectively than ever before. This requires teamwork, attention to detail and an interim process that attempts to make improvement every step of the way. This is a work in progress, but we are getting better. We are also continued investing in our technology team.

Speaker 1

We've improved our team's capabilities and are focused on modernizing both our key technology architecture and how our team perform work with the goal of increasing the speed at which we enhance our product for dealers and consumers. During the quarter, we received 4 awards from Origin, USA Today and People Magazine recognizing us as a great place to work. We continue to focus on making our amazing workplace even better. We support our team members in making a difference to what makes a difference to them. In connection with their efforts, we contributed to organizations such as 42 Strong, American Foundation For Suicide Prevention, Atlanta Area School District, Children's Hospital of Michigan and Pure Heart Foundation.

Speaker 1

Now, Jay Martin and I will take your questions along with Doug Busk, our Chief Treasury Officer Jay Brinkley, our Senior Vice President and Treasurer and Jeff Soussar, our Vice President and Assistant

Operator

Our first question comes from Moshe Orenbuch with TD Cowen.

Speaker 2

Great, thanks. I appreciate the comment that you're confident that the returns are higher than your hurdle rates. But I guess maybe could you just spend a little more time on that idea because they're all based upon estimates and the estimates have been revised down for 6 quarters. So I guess, I mean, the real question is, how do you know and what is it are we going to be having the same conversation 90 days from now? Like how should we think about that?

Speaker 1

Yes. So our estimates in our Q3 release represent our best estimates of how we believe these loans are going to perform in the future. That considers the underperformance we've seen today on post pandemic vintages. To your point about what do we expect to see in the future, I would say our forecasting models performed best during relatively stable economic periods for this concept are less accurate during periods of volatility like we've experienced since the pandemic. Let's say the biggest declines we saw in the quarter related to the 21 to 22 cohorts, tough to say precisely why these have continued to underperform, but we know there are likely multiple contributing factors, including that these loans were originated during a very competitive period, which generally hurts loan performance.

Speaker 1

Consumers purchased vehicles at peak valuations, vehicle prices subsequently declined and then the impact of inflation. We understand that others in our industry have experienced similar or worse performance on these cohorts. So we don't believe this trend is unique to Credit Acceptance. As it relates to the 'twenty one to 'twenty two business, as we point out that those that business is more seasoned. We've collected 81% of what we ultimately expect to collect on the 'twenty one business, 61% of what we ultimately expect to collect on the 'twenty two business.

Speaker 1

Going forward, those cohorts are going to have less of an impact on our financial results. It's going to have more of an impact on our financials based on how our 2023 and 2024 loans perform because we wrote more business in those years and those loans are also seasoned. And then as we get into next year, it will be more weighted to what we write in 2025.

Speaker 2

Right. I guess I would just maybe tack on to that the idea that it isn't so much about volatility, it's about different factors affecting what has driven consumer behavior in this cycle versus previous cycles. And I guess it just pushes me to this question of is it an estimation problem or is it actual underwriting problem? Have you thought about changing the way you actually underwrite these loans?

Speaker 1

Let's say our forecast we continue to consider recent performance. So as we're originating new loans, we've considered the underperformance that we've seen in these 2021 2022 loans. So we've adjusted and lowered our initial estimates on those future loans to consider that. So we believe we are considering the underperformance there. And as I mentioned before, we don't believe this is a problem unique to credit acceptance.

Speaker 1

We believe we're seeing this across the industry.

Speaker 2

Right. Okay.

Speaker 1

That's accordingly moving forward.

Speaker 3

All right.

Speaker 2

And then just last one for me. You didn't buy back any stock in the Q3 or in October to date from the filing of the Q, it looks like. So can you just talk a little bit about capital? It looks like loan growth is strong, but decelerated a little. So can you just talk about that?

Speaker 1

Sure. As we've said many times over the years, our first priority is to make sure we have the capital that we need to fund the business. If we feel we have excess capital, then we'll take a look at the stock price. And if we think we can buy it for less than intrinsic value, we'll return capital to shareholders. For most of Q3, we had higher outstanding balances on our revolving credit facilities than we customarily do.

Speaker 1

Now that situation was remedied at the very end of September when we did a relatively large ABS deal. So given the fact we had more revolver usage and the leverage at the end of Q3 is at the high end of the historical range and given uncertainties about collection performance and capital market conditions in light of the election, we took a bit more of a conservative approach. As you know, we repurchased a significant number of shares over a long period of time, over 30,000,000 shares since the late '90s. But we don't do it consistently. Some periods we buy back a lot.

Speaker 1

Some periods we buy back very little. So I don't think that you can take a look at 1 quarter and assume that's the basis for a new trend line.

Speaker 2

Got it. Thanks very much.

Operator

Our next question comes from the line of John Hecht with Jefferies.

Speaker 3

Good morning, guys. Thanks.

Speaker 4

Hello?

Operator

John, you may have muted your line. Our next question will

Speaker 5

come from

Operator

we have a question from the line of John Rowan with Janney Montgomery Scott.

Speaker 4

Good morning. I guess I just want to drill down a little bit into what lower consumer prepayments means. I mean, we've asked on the call before, is that related to lower repossession or lower wholesales after repossession. But I guess drill down a little bit. Like what is it?

Speaker 4

Is it are you not getting the judgments you need when you go and you sue someone for deficiency? Is it just consumers not paying on older debts that are in the tails? Or is it really just or has there been just a wholesale change in the number of consumers who are defaulting on loans? I'm just trying to get a better understanding of what that fairly generic term means.

Speaker 1

Yes. It's primarily referring to consumers refinancing their loans and moving on to either traditional forms of financing or purchasing a new car. In periods where there's limited availability of the credit to consumers, we tend to see lower levels of prepayments and that's what we're currently seeing.

Speaker 4

Okay. And but that's driving a lot of forecast revisions. But I mean, look, I've covered the company for a long time. There have been periods in which there's been absolutely no credit availability, right, to consumers, even I mean, even much worse than right now. How does that compare historically to those periods?

Speaker 1

I would say we're near historical lows there currently. So we have seen similar low periods, but this is one of the lower periods that we've seen. And our forecast uses more of a historical average of what we've seen with prepayments. And we've seen that come down, which pushes our cash flows out into the future, which lowers the yield that we'll realize on the loans.

Speaker 4

Okay. All right. Thank you.

Speaker 1

I would just add that forecasting the timing of cash flows is challenging since it's dependent on the competitive environment and no one can really forecast how a competitive environment is going to behave in the future. So it is challenging. I think we take our best track at it, but it's tough.

Speaker 4

Actually, let me ask you another question. So if people are refinancing their cars, is that why is that? Is that a function of used car prices that they're sitting on a negative equity position and they don't want to refinance the car and owe some money? Or what is driving that lower level of refinancing activity?

Speaker 1

Yes. I think that certainly could be a factor. And I think just the general availability of credit to the consumer is also a factor. But I think the factors you mentioned are contributing factors.

Speaker 4

Okay. All right. Thank you.

Operator

Our next question comes from John Hecht with Jefferies.

Speaker 3

Good morning, guys. I apologize for the technical issue earlier. I just kind of follow on questions for both the preceding questions. I know this cycle is unique, but in historical cycles whether your capital was scarce and maybe there was disruption in the environment, those tended to be favorable environments for you. As an example, thinking about post the great financial crisis.

Speaker 3

This one continues to be challenged. I guess the question is, what do you guys think has to happen to clear the market out to the point where it is an opportunistic environment for you? Is it simply just work through the 2022 vintage? Do residual prices need to come down further? Or what other factors might we look out for?

Speaker 1

Yes. I think it's primarily continuing to adjust our loan forecast when we're originating new loans to consider the performance we've seen and that's what we've continued to do. As I mentioned earlier, the 2022 loans have a less significant impact on our financial statements going forward. Our results will be more based on how our 'twenty three and 'twenty four business performs and going into next year how our 'twenty five business performs. But we as Ken mentioned, we know that forecasting collection rates are difficult.

Speaker 1

So we have a business model that's designed to produce acceptable returns in aggregate even if loan performance is worse than forecasted. So we'll continue to take that approach as we move forward.

Speaker 3

Okay, thanks.

Operator

Our next question comes from the line of Robert Wildhack with Autonomous Research.

Speaker 5

Good morning, guys. Question on the 2023 2024 vintages specifically. With 2nd quarter earnings, I think you mentioned that you expected 2023 2024 to behave similarly to 2022. As it stands today though, forecasted collections are 4 percentage points higher for 2023 and 2024 respectively versus 2022. How should we square that difference?

Speaker 5

Do you think there's another shoe to drop with respect to 2023 2024? And if so, when do you think that could happen?

Speaker 1

Yes. I think it's difficult to look at just the absolute collection rate because we've originated different mixes of business during those years. I think we need to look at our variance to our initial forecast and you'll see that's currently lower on the 'twenty three and 'twenty four loans and part of that's due to us having lowered our initial estimates on the 'twenty three and 'twenty four loans when we have originated that because we had started to see some underperformance on the 'twenty one and 'twenty two loans, we considered that. And then we're also looking at the trends of what 'twenty three has done so far versus 'twenty two and we know those loans are performing better. So based on those two factors, we believe that the 'twenty three business and the 'twenty four business will perform better than the 'twenty two business.

Speaker 1

But I would also point out, especially the 'twenty four business, it's not very seasoned at this point. Yes. And I would just add that we said in prior calls that we were observing a similar trend in underperformance on the 'twenty three and 'twenty four loans, though that trend was less severe on the 'twenty two loans. So we are seeing a similar pattern, but less severe. And then to Jay's point, we've adjusted our forecast or forecast on 'twenty three and 'twenty four was more conservative than 'twenty one and 'twenty two.

Speaker 5

Okay. How do the recent hurricanes, how will those impact forecasted collections, if at all?

Speaker 1

The hurricanes impacted mainly Florida and North Carolina. Those 2 states are about 4.2% and 1.5% of our portfolio. But obviously, the hurricanes did impact the entire state. So overall, they're really not that material impact to our portfolio. That said, they've been incredibly impactful for the people in the direct path.

Speaker 1

So consistent with our approach for many years, we're working to get those impacted by the hurricanes in ways to help them get back on their feet.

Speaker 5

Okay. If I could just sneak one more in and ask Ken about something you highlighted earlier, specifically the 22 vintage would still generate economic profit. I was wondering if you could give some more context there, like how much more economic profit does a good vintage like, say, 2019 generate versus 2022?

Speaker 1

I mean, we've got a wide variance of economic profit. Obviously, 2019 was buoyed by stimulus payments and it over collected. I don't really want to get into details of our kind of profitability by vintage. But I guess what I would say is 2019 was a highly profitable vintage and 2022 is a lesser profitable one, but they all produce economic profit, which means they're all profitable vintages.

Speaker 2

Okay. Thank you.

Operator

Our next question comes from the line of Ryan Shelley with Bank of America.

Speaker 6

Hey guys. A quick question here. So the active dealer count has come down few quarters now. Can you just touch on what's driving that? Is that like a function of the softer market or being more selective?

Speaker 6

Just any color there would be great.

Speaker 1

I think at the dealer counts, it is fairly flat, to be honest. It was higher in the Q1 due to seasonality. I would say in terms of the competitive environment, for a while, it seemed like a lot of people are pulling back. It seems like that subsided somewhat and maybe the competitive environment is returning more to a normal environment. However, that being said, we've still been able to grow our market share and we've been able to we're on pace for our highest volume year ever.

Speaker 1

So I feel good about where we're at in terms of the competitive environment and how we're able to grow the business.

Speaker 6

Got it. And then just one more quickly, if I could. So you have a bond maturity in March 26, but it's callable at par now. How should investors think about your thought process around addressing that? Thanks.

Speaker 6

Yes. We're watching market conditions there very

Speaker 7

closely. 2 good facts with that bond tranche. First, we have plenty of time. It doesn't mature until March of 2026, so a year and a half to do something. The other good fact there is relatively small, dollars 400,000,000 so small relative to the size of our balance sheet and our liquidity.

Speaker 7

So we have plenty of options. We can refinance it in the senior note market. We can refinance it using securitization or we can just draw on our existing liquidity. Rates for a new bond issue would probably be higher than that coupon that's on those notes today. So we're not in a rush to do anything with it.

Speaker 7

So we'll continue just to monitor it and do something appropriate before the maturity.

Speaker 6

Understood. Thank you.

Operator

Our next question comes from the line of John Rowan with Janney Montgomery Scott.

Speaker 4

Hey guys, just one follow-up. The 2022 vintage is now sitting at a 13.2% spread versus an initial of 20.1 percent. Obviously, it's a relatively big decline. But how do we think about where the level of economic profit doesn't become justifiable, right? I mean, 13.2% spread, if that's proxy for the internal rate of return to that pool, do we just look at that number to go down to the to your funding costs?

Speaker 4

Or where does that number become uneconomical to you?

Speaker 1

I mean it depends on which program you're talking about. So on the purchase program, 1% decline in the forecasted collection rate. Your tax affect that and you have to account for timing, but that ends up driving a reduction in our return. The portfolio program is a little bit more complicated to think about, because the shortfall of collections is shared on a eightytwenty basis with the dealer up to a certain point. So the portfolio program insulates us from variations of consumer loan performance where the purchase program doesn't.

Speaker 1

So the purchase program is obviously a lot more sensitive. Our profitability on the purchase program is more sensitive to declines in forecasted collection rates. That is the portfolio program.

Speaker 4

Okay. All right. Thank you.

Operator

With no further questions in queue, I would like to turn the conference 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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Key Takeaways

  • Credit Acceptance’s Q3 forecasted net cash flows declined by 0.6% as vintages from 2021–2023 underperformed expectations amid post-pandemic volatility, though the 2022 vintage remains profitable.
  • The company set Q3 records with 17.7% unit growth and 12.2% dollar volume growth, driving the adjusted loan portfolio to a new high of $8.9 billion and securing a 6.2% market share.
  • Management emphasizes a long-term pricing and underwriting strategy designed to deliver acceptable economic profit even during periods of forecasting uncertainty or weaker loan performance.
  • Credit Acceptance continues to invest in its go-to-market processes and technology architecture, while earning external recognition as a great workplace and supporting communities hit by hurricanes.
  • Capital deployment remains disciplined: with revolver usage at the high end of its range, the company paused share buybacks but will resume repurchases when excess capital can be deployed below intrinsic value.
AI Generated. May Contain Errors.
Earnings Conference Call
Credit Acceptance Q3 2024
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