Credit Acceptance Q1 2024 Earnings Call Transcript

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April 30, 2024

Key Takeaways

  • Adjusted net income of $117 million (down 8% YoY) and adjusted EPS of $9.28 (down 4% YoY) reflect a moderation in profitability.
  • Unit originations grew 24.1% and dollar volume grew 20.2% YoY, while the average loan portfolio balance hit a record high and the initial spread widened to 22% from 21%.
  • Forecasted net cash flows from the loan portfolio declined by $31 million (0.3%) due to lower collection rate assumptions and below-average consumer loan prepayments.
  • Average cost of debt rose to 7% from 5%, driven by higher interest rates on recent secured financings and senior notes.
  • Repurchased approximately 728,000 shares (6% of outstanding) in Q1, underscoring management’s focus on returning excess capital to shareholders.
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Earnings Conference Call
Credit Acceptance Q1 2024
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good day, everyone, and welcome to the Credit Acceptance Corporation First 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 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 Q1 2024 Earnings Call. As you read our news release posted on the Investor Relations section of our website

Speaker 2

at

Speaker 1

ir.creditacceptance.com And as you listen to this conference call, please recognize 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. Consider all forward looking statements in light of those and other risks and uncertainties. Additionally, I should mention that 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 Thanks, Jay.

Speaker 1

Our GAAP and adjusted results for the quarter were

Speaker 2

Thanks, Jay. Our GAAP and adjusted results for the quarter as compared to the Q1 of 2023 include the following. First related to earnings, adjusted net income of $117,000,000 which is an 8% decrease from the Q1 of last year and adjusted earnings per share of $9.28 which is a 4% decrease from the Q1 of last year. 2nd related to collections, a decrease in forecasted collection rates that decreased forecasted net cash flows from our loan portfolio by 31,000,000 dollars or 0.3 percent compared to stable forecasted collection rates during the Q1 of last year that increased forecasted net cash flows for our loan portfolio by $9,000,000 or 0.1%. Also forecasted profitability for consumer loans assigned in 2020 through 2022 that was lower than our estimates at March 31, 2023 due to a decline in forecasted collection rates since the Q1 of 2023 and slower forecasted net cash flow timing during 2023 in the Q1 of 2024.

Speaker 2

This was primarily a result of a decrease in consumer loan prepayments, which remain at below average levels. Then related to volume, unit and dollar volumes grew 24.1% and 20.2% respectively as compared to the Q1 of last year and the average balance of our loan portfolio is now the largest it has ever been. On a GAAP and adjusted basis, it increased by 12% 16%, respectively, as compared to the Q1 of last year. Additionally, an increase in the initial spread on consumer loan assignments to 22% compared to 21% in consumer loans assigned in the Q1 of 2023. Also an increase in our average cost of debt from 5% to 7%, which was primarily due to higher interest rates on recently completed or extended secured financings and recently issued senior notes, coupled with the repayment of older secured financings and senior notes with lower interest rates.

Speaker 2

Finally, the decrease in common shares outstanding since the Q1 of 2023 due to stock repurchases of approximately 728,000 shares or 6% of the shares outstanding as of March 31, 2023. At this time, Doug Busk, our Chief Treasury Officer, along with Jay and I will take your questions.

Operator

And our first question comes from Rob Wildhack from Autonomous Research. Your line is now open.

Speaker 3

Hi, guys. Maybe to start out, I just wanted to ask about April unit volume slowing from 11% or to 11% from 24% in the Q1. Could you talk about what's driving that? Is it just difficult compare or maybe something else that's contributing?

Speaker 2

It's a little difficult to say. There really hasn't been a material change from our perspective in the competitive environment. We do think our accounts are a little bit tougher, lots of that could be why.

Speaker 3

Okay. And then on the competitive environment and in your experience, once competitors have pulled back like they seem to have done or be doing now, what does it usually take to get them to reenter the market?

Speaker 2

I think it's a big decision when someone pulls out. I don't know the exact timing of when competitors would go back in, but it doesn't seem like something you would take lightly or you would come back in quickly. So I think they would need to stabilize their business more and maybe get better access to funding. But again, we're really kind of speculating here. We tend to focus on ourselves, but it's definitely favorable from our standpoint as our competitors pull out.

Speaker 2

Okay, thanks.

Operator

And thank And our next question comes from Toni Orns from S&P Global Market Intelligence. Your line is now open. One moment please. And our follow-up question is from Rob Wildhack from Autonomous Research. Your line is now open.

Speaker 3

Hey, maybe just one more on the buyback in the quarter, which was pretty punchy. I think you said before the preferred use of capital is to originate loans and then to share repurchase. So just wondering if there's anything to read into around the elevated buyback in the quarter and the origination growth you're expecting going forward?

Speaker 4

Not really. I will say that we raised a fair amount of new capital in the last part of 2023. We did a $500,000,000 securitization during the Q1. So we are growing, but we've raised a significant amount of capital. So we felt good about deploying some of that capital in the form of LiveX.

Speaker 3

Okay, thanks. Thank you.

Operator

And one moment for our next question. And our next question comes from Toni Orange from S&P Global Market Intelligence. Your line is now open. Tony, if you one moment please for our next question. Just one moment.

Operator

And our next question comes from Ryan Seli from Bank of America.

Speaker 5

Hi guys. Thanks for the question. Just one here on the forecasted collection percentage for the 2022 vintage. I noticed that's down 5.4%. Do you guys have any color there?

Speaker 5

Is there anything with that specific vintage that you could point to? That would be great.

Speaker 2

Yes. I mean, I think the

Speaker 4

first thing I'd point out is based on our understanding, that's a subprime auto finance industry phenomenon. So nothing unique about our experience there. I think there are a variety of contributing factors there. Those loans originated in a very competitive period, which tends to hurt loan performance. Those consumers finance vehicles at pretty close to peak valuations.

Speaker 4

Vehicle prices have subsequently come down. And then, of course, there is the impact of inflation on the subprime consumer. Inflation is lower than it was a couple of years ago, But the cumulative effect means that things cost a lot more today than they did a few years back. So I think it's probably the combination of those factors.

Speaker 5

Got it. Thank you very much.

Operator

And thank you. With no further questions in the 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 our 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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