Credit Acceptance Corporation (CACC) Earnings Call Transcript & Summary

Good day, everyone, and welcome to Credit Acceptance Corporation Second Quarter 2022 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 Treasurer Officer, Doug Busk.

Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation Second Quarter 2022 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. 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. Our GAAP and adjusted results for the quarter include unit and dollar volumes grew 5.1% and 22%, respectively, as compared to the second quarter of 2021, a decrease in forecasted collection rates for loans originated in 2020 through 2022, which decreased the forecasted net cash flows from our loan portfolio by $43 million. Adjusted net income decreased 18% from the second quarter of 2021 to $188 million. Adjusted earnings per share increased 1.5% from the second quarter of 2021 to $13.92. Stack repurchases of approximately 404,000 shares, which represented 3% of the shares outstanding at the beginning of the quarter and a $12 million expense related to an agreement in principle to settle a previously disclosed class action lawsuit and a $20 million increase in stock-based compensation expense primarily due to the retirement of our former CEO in May 2021 and the timing of shareholder approval for 2020 and 2021 stock option grants. At this time, Ken Booth, our Chief Executive Officer; Jay Martin, our Senior Vice President, Finance and Accounting, and I will take your questions.

[Operator Instructions] And our first question comes from Moshe Orenbuch from Credit Suisse.

In the last quarter, you guys talked a little bit about your results and what you were doing with respect to kind of the higher credit quality. I guess, I'm trying to understand, you do have -- your adjusted revenue or the yield as a percentage of your average capital did go up in the quarter. Could you just kind of square for us how to think about that? What's happening in terms of the actual yield on the portfolio? Or is that a function of the denominator, could you talk about that a little bit?

Yes. The adjusted yield on the portfolio increased this quarter, and that was primarily due to loan performance in Q1 being quite a bit better than we would expect or we expected. As you can see in the press release, loan performance slightly underperformed our expectations this quarter, all else equal, that will have a negative impact on the yield in future periods.

Got it. But that's -- you're saying, it's separate and distinct from the mix in terms of the kind of higher quality loans that you're originating.

Correct. Yes. It's all relative to our initial expectations and what happened during the period.

Got you. And I guess when you think about that because sometimes you talk about like a change in methodology that results in that. There was no mention of that this time. So is there anything you could kind of point to as like the root cause of that underperformance kind of changing from first quarter to second quarter, you said it was better than expected in the first quarter.

It's tough to say precisely why it occurred, but it's likely due to a few factors. Obviously, the end of stimulus and supplemental unemployment benefits and perhaps it took a little while for consumers to work through the savings that they had accumulated during those programs. And then I think the other thing that's impacting the consumer out there is just the inflationary environment.

So is it reasonable to expect that, that would continue into future quarters?

I can't predict the future any better than anyone else, but I guess my expectation is as long as inflation remains elevated and nothing else changes in a material way, that I think that's probably a reasonable assumption. I mean, I think that we had a 2-year period where loan performance was significantly better than expected. And those tailwinds are no longer present and there are some potential headwinds such as inflation.

Got you. And then last one for me is that, it also just does seem that it kind of rolled through the second quarter, same sort of pace that your capital return was slowing and it's been June, July, probably pretty much de minimis kind of thoughts there as we go forward.

Like we've said on prior...

Please remain online. Your conference will resume shortly. [Technical Difficulty]

I think you're back on. Yes.

Okay. We're back on. Moshe, I'm not sure how much of my response there, you heard or didn't hear. But I guess I'll just assume you didn't hear very much of it. And I would say that, as we've said on prior calls, historically, we returned less capital to shareholders, the higher our leverages, and the more we're growing. And in recent periods, our leverage has been at the high end of the historical range. And in the second quarter, we started to see some more positive results from a loan growth perspective. Sorry about the interruption.

[Operator Instructions] And our next question comes from Ray Cheesman from Anfield Capital Management.

Doug, you mentioned that inflation as a headwind. Is the Manheim Index finally showing some softness in the used car market where I believe most of your portfolio exists. Is that an impact that also will be a headwind going forward versus the terrific lift it gave over the last 8 or 10 quarters?

We haven't seen any material move in used car prices relative to the vehicles that were disposing of at auction. But it certainly is a potential headwind. Used car prices continue to be at elevated levels. I can't predict the future, but at some point, it seems reasonable to expect that they refer to more normal levels. But how quickly and how dramatically that occurs is anyone's guess.

Okay. Also, you guys took off the COVID overlay, I guess, in the first quarter. And as we look forward, and I know you're not a big fan of looking -- telling us forward, but when I have guys like AT&T telling me that they got customers who can't pay for their cell phones, that's new news. And so -- and then you clearly see the bottom portion of the FICO scale struggling, as you mentioned, inflation amongst other things, less government support programs, et cetera. You also said that the last 2 years have been a different time. When do we get back to old normal where performance, say, from 2015 to 2020 prior to COVID is what we would expect to see going forward. And these weird 2 years kind of flows through and finishes. Does it take 2 quarters, 6 quarters, 12 quarters?

I don't think anyone really knows. I mean, I guess it depends on what you define as normal. But -- we're a little more normal and that we no longer have stimulus and unemployment benefits. But we're definitely abnormal and we're experiencing the highest inflation since the '80s. So we continue to be an unusual environment. And when that returns to normal is anyone's guess.

Are there any -- I'll give you an example, one main, the Springleaf lenders that also lend to lower FICO customers has changed the credit box and "tightened" things up. Are there adjustments that Credit Acceptance is making to its ongoing business model to try to stay ahead of any changes that they expect to occur in a couple of quarters ahead?

We're always attempting to forecast collection rates as accurately as possible. And to the extent that we need to make changes to do so, we do that. It's our practice not to provide details relative to any adjustments that we do make.

And congratulations, by the way, on finding middle ground on that lawsuit and putting it aside.

And our next question comes from Matthew Hurwit from Jefferies.

Actually, it's John Hecht from Jefferies. I guess, just broadly speaking, just because I think most of us are aware that the capital markets are a little bit in disarray, spreads widening. Just how does that impact kind of the management's thinking there in terms of volumes and so forth. Do you -- and you guys have been serial issuers with a big buyer base. But does the current state of the capital markets affect your thinking at all?

Certainly. We've noticed -- we completed the deal recently and the capital markets are functioning differently than they were 6 to 12 months ago. So we're aware of it, and we're monitoring it closely. So we're factoring it into the way we're running the business for sure.

Okay. And then the spread, as you guys kind of highlight the spread in the different cohorts, I mean it's on both the purchase and the dealer program; one of the spreads, certainly, as long as I can remember at a low level. Any commentary on that? Or should we think that we're bottoming out here, kind of -- I guess, the way you're underwriting and issuing, how do we think about where the spread might go.

We typically don't discuss our pricing strategy other than to say we're always trying to maximize the amount of economic profit that we originate. And so that would be economic profit per loan times the number of loans we originate. So if we felt that it made sense to pay more, have a lesser spread, but write more business, we do that conversely, if we thought it made sense to pay a little less and have a larger spread, but do a little less volume, we do that, too. So we're trying to price the product optimally.

Okay. And then last question, I know there's some seasonal elements to this and that, but you had a pretty big inflow of new dealerships. How do we think about that?