Credit Acceptance Q2 2024 Earnings Call Transcript

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July 31, 2024

There are 7 speakers on the call.

Operator

Good day, everyone, and welcome to the Credit Suisse Corporation Second 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. At this time, I'd 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's Q2 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.

Speaker 1

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 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 our Q2 results.

Speaker 2

Thanks, Jay. We had a mixed quarter as it related to collections and originations, 2 key drivers of our business. Our 2022 vintage continued to underperform our expectations and our 2023 vintage began to slip as well. We made an additional $147,000,000 adjustment to forecasted net cash flows on top of our normal loan forecast model, but just our loans originated in 2022, 2023 and the first half of twenty twenty four, what we believe the ultimate collection rate will be based upon trending data over the last several years. Historically, our models have been very good at predicting loan performance in aggregate, but our models worked best during less volatile times.

Speaker 2

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 have had larger than average forecast misses, both high and low during this volatile period. But because we understand forecasting collection rates is challenging, our business model is designed to produce acceptable returns even if loan performance is less than forecasted. Even with our reduction of forecasted collections this quarter, we believe we will continue to produce substantial economic profit per share in the future. As I've explained in the past, we are less reactive to changes in competitive and economic cycles than others in the industry because we take a long view on the industry, we price to maximize economic profit over the long term and we seek to best position the company as access to capital becomes limited.

Speaker 2

Ultimately, we are happy we have the discipline to maintain underwriting standards during the easy money times of 2021 and especially 2022. As well our market share was lower during those years, we believe it has put us in a better position to take advantage of more favorable market conditions today. During the quarter, we experienced strong growth and had our highest Q2 unit and dollar volume ever, growing our loan unit and dollar volume by 20.9% and 16.3% respectively. Our loan portfolio is now at new record highs at $8,600,000,000 on an adjusted basis. Our market share in our core segment continues to increase being 6.6% as of May 31, 2024.

Speaker 2

Now these 2 key drivers, we continued making progress during the quarter towards our mission of creating intrinsic value and positively changing the lives of our 5G 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, dealers make incremental sales to the roughly 55% of adults with other than prime credit. For these adults, it enables them to obtain a truck vehicle to get to their jobs, take their kids to school, etcetera. It also gives them the opportunity to improve or build their credit. During the quarter, we originated 100,057 contracts for our dealers and consumers.

Speaker 2

We collected $1,300,000,000 overall and paid $84,000,000 in portfolio of profit from portfolio profit expressed to our dealers. We added 10 80 new dealers for the quarter and now have our largest number of active dealers ever for a second quarter with 10,736 active dealers. From an initiative perspective, we continue to try new go to market approaches using a test and learn approach. We believe some of these have been successful and have contributed to our growth. We also continued investing in our technology team.

Speaker 2

We have ramped up personnel and are focusing on modernizing how our team perform work with the goal of increasing the speed in which we enhance our product for our viewers and consumers. During the quarter, we received 3 awards from Fortune, U. S. News and the Best Practices Institute recognizes it's a great place to work. We continue to focus on making our amazing workplace even better.

Speaker 2

We support our team members in making a difference and we'll make the difference to them in connection with their efforts. We contributed organizations such as Make A Wish Foundation, St. Jude Children's Research Hospital, the Shades of Pink Foundation, and Varsity Blood Center of Michigan among others. Now, Doug Busk, our Chief Treasury Officer, Jay and I will take your questions.

Operator

Thank you. At this moment, we will conduct a question and answer session. Our first question comes from the line of Moshe Orenbuch of TD Cowen. Your line is now open.

Speaker 3

Great, thanks. Is there any way to kind of explain what changes you made in the forecasting methodology? Did you have, Mrs, more on the likelihood of default recoveries on the auto afterwards or any other practice changes that are involved?

Speaker 4

Well, the first thing is, is we now believe that the 2022 originations are seasoned enough for us to enhance our estimate over what we provided previously. What we've done simplistically is we have assumed that the 23 and 24 originations are going to exhibit similar trends in terms of variance from the initial forecast and the slope of the collection curve, which we've divided out over time. We're assuming that those percentage changes is going to be similar to what we've seen in 2022. Those trends that we're seeing in 2023 2024 are there, but they're less severe than the 2022 loans. And since the post book of business are also performing better from an absolute perspective, the adjustments in percentage terms is less significant than the miss we're going to have on the 'twenty two business.

Speaker 4

So it was really just assuming that the 'twenty three and 'twenty four originations will behave similarly on a percentage basis to what we've seen on 'twenty two.

Speaker 3

Doug, one of the things that's unique about the way you guys kind of report your adjusted earnings is you take that hit into your provision this quarter, but you spread out the impact on future periods. You had a 19.6 percent yield adjusted revenue yield. Like can you give us some way of thinking about how much of this is going to flow through and over what period and how to think about the impact on that 19.6%?

Speaker 4

Well, I think just the yield on the loan asset was 17.7% in the quarter. I think revenue was a percent of average capital of 19.6%. So 2 slightly different things, but they'll behave similarly. All else equal, if loan performance is exactly as expected, we would expect the yield or revenue, if you want to look at it as a percent of average capital, to decline in Q3. The magnitude of the decline will obviously be dependent on the yield on new originations and obviously whether loan performance is better or worse than expected.

Speaker 4

But all else equal, we would expect revenue or the yield on the portfolio to decline.

Speaker 3

Last one for me. And honestly, I'm struggling as to how to phrase this, but given that this is the second of these in basically a year, I guess, why is it a good thing that you're originating more loans? Like in other words, shouldn't you be doing the opposite? Shouldn't you be pulling back and saying maybe we're doing something wrong here?

Speaker 4

It's a fair question. As Ken said in his intro, we still believe that these loans are producing returns in excess of our weighted average cost of capital. That's generally high returns in New Jersey from others in the industry. So we think it's adding shareholder value to continue to originate the business that we're originating. And as I said, we feel better about the 'twenty three and 'twenty four loans than we did about the 'twenty two loans, which were obviously very disappointing to

Speaker 3

us. Okay. Thank you very much.

Operator

Thank you. One moment for our next question. Our next question comes from the line of John Rowan of Janney Montgomery Scott. Your line is now open.

Speaker 5

Good afternoon, guys. I guess I'm going to ask Moshe's question, but a little differently. The implied spreads are still pretty high. The initial implied spreads for 2024 are still high historically speaking. What gives you confidence that those are the right numbers given the magnitude of the reductions that you're putting into prior forecast revisions?

Speaker 3

And I guess, just trying

Speaker 5

to figure out if there's more risk of continuing to write portfolio down if we're aggressive on some of the assumptions going in that are again still writing to relatively high spreads historically speaking?

Speaker 4

I mean we're as I said, we're basing our current estimate for 2023 2024 based on the absolute performance to date of those vintages. And then we're applying a similar degradation in the collection rate over time to what we've seen on 'twenty two. Now we're using history as our guide there and forecasting consumer loans, especially in recent years has been challenging. So we're putting our best number on it. But is there a chance we could be wrong?

Speaker 4

There's always a chance.

Speaker 5

Okay. And then just for kind of modeling purposes, obviously, with the GAAP loss in the quarter, I assume the share count that you reported was the basic share count. Can you just give me an idea of what the like real diluted share count would be or how many diluted shares you'd have so going forward get that in the

Speaker 4

model? Yes.

Speaker 2

I think if you look at in

Speaker 1

our 10 Q and earnings per share footnote, it'll show you how many shares were anti dilutive for the quarter. That is the case. So it was a loss. We needed to stick with the basic shares. Just taking a quick look here to see what was excluded as anti dilutive.

Speaker 1

Looks like it was around for the quarter 217,000 shares.

Speaker 5

Okay. That's what I needed to know. Thank you.

Operator

Thank you. One moment for next question. Our next question comes from the line of Rob Wildhack of Autonomous Research. Your line is now open.

Speaker 6

Hi, guys. One more on the 2023 vintage. Some other lenders have talked about the early part of that year, maybe the Q1 of 2023, loans originated then is driving underperformance for that vintage. Would you echo that? Or is the underperformance that you're seeing in 2023 pretty broad based across originations throughout the year?

Speaker 4

No, I would say that that's a fair comment. We have seen a situation where the early 2021 loans performed better than the last half of twenty twenty one. The first part of twenty twenty two was kind of the bottom from a performance perspective. Things got somewhat better at the end of '22 and got better in the 1st part of 'twenty three, but the underperformance on the performance of the second half of 'twenty three loans was better than the first half for sure. And that trend has continued into 2024.

Speaker 4

So long winded answer, I would agree with your commentary.

Speaker 6

Okay. Thanks. And then just on the unit growth, I think April was slower than the quarter was in aggregate, which would imply a step up in growth in May June. Is there anything specific that was driving the acceleration in May June? And then to ask the question kind of forward looking, July looks pretty strong at +28%.

Speaker 6

Anything to call out there? Is July benefiting from an easy compare or anything like that? Or do you think you can continue to grow at that pace going forward? I think

Speaker 2

it's always difficult to predict. There's a lot of macro uncertainties around the competitive environment, inflation, interest rates, things like that. And you are right that it's improved throughout the quarter and into July, whether that continues or not, it's really tough to say. We will have comparable comparables going forward. That being said, we have made improvements to our product and we're hoping that's having a difference as well.

Speaker 2

And we believe that is

Speaker 1

a positive impact. So if

Speaker 2

you look at buying for dealer itself, so that's a good sign for us and that means our product is probably better and it means our better environment is better

Speaker 4

and hopefully that continues. Yes. I think the other point I would add to what Ken said is, it's hard to draw any conclusion from just looking at 1 month at a time. I mean, if I look at the growth rates for the quarter, April was 17%, May was 26%, June was 20% and then July is back up running at 27%. So when you break it down into smaller units, you obviously get more variability.

Speaker 6

Yes. Okay. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Ryan Shelley of Bank of America. Your line is now open.

Speaker 6

Hey, guys. Quick question here. So along with your earnings, you filed amendments to both the revolving credit agreement and one of the warehouse agreements around the definition of consolidated net income. Can you just explain the rationale there? And yes, like what that definition change is all about?

Speaker 4

Thanks. Yes. I mean, as we've said for years in our press releases, we think the best way to evaluate our financial performance is on the basis of level yield accounting based on forecasted cash flows. So we're looking at the forecasted amount and timing of the cash flows and discounting that back and that gives you a yield and we're using that yield for revenue recognition. And then if every month you re forecast the loans and if your forecast goes up or down, you adjust your forecast respectively.

Speaker 4

The adjustments that we made to the definitions in those credit facilities basically start with GAAP net income, back out the provision for credit losses and then apply the floating yield adjustment. And when you do that, you get to level yield revenue recognition based on forecasted cash flows.

Speaker 6

Got it. Thanks. Thanks for the time.

Operator

With no further questions in the queue, I would like to turn the conference back over to Mr. Martin for 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

  • Due to volatile post-pandemic conditions, the 2022 and early 2023 loan vintages underperformed expectations, prompting a $147 million adjustment to forecasted net cash flows.
  • The company posted its highest Q2 ever, with loan unit volume up 20.9%, dollar volume up 16.3%, and an adjusted loan portfolio reaching a record $8.6 billion while expanding market share to 6.6%.
  • Management emphasized its long-term underwriting discipline and pricing strategy, arguing the business model still delivers returns above cost of capital even when loan performance falls short of forecasts.
  • Operationally, Credit Acceptance originated 100,057 new contracts, collected $1.3 billion, paid $84 million in dealer portfolio profit, added 1,080 new dealers, and reached a record 10,736 active dealers in Q2.
  • Investments in technology and go-to-market innovation continue, including ramped up tech staffing and a test-and-learn approach, while the firm won multiple workplace awards and supported several nonprofits.
AI Generated. May Contain Errors.
Earnings Conference Call
Credit Acceptance Q2 2024
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