Credit Acceptance Corporation (CACC) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the Credit Acceptance Corporation First 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 Treasury Officer, Doug Busk.

Thank you. Good afternoon and welcome to the Credit Acceptance Corporation First Quarter 2023 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 laws. 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 forecasted profitability per consumer loan assignment for consumer loans assigned in 2020 through 2022 that was lower than our estimates at March 31, 2022, due to a decline in forecasted collection rates during the last 3 quarters of 2022 and slower net cash flow timing during the first quarter of 2023 primarily as a result of a decrease in consumer loan prepayments, stable forecasted collection rates during the first quarter of 2023 with forecasted net cash flows from our loan portfolio increasing by $9.4 million or 0.1%. In comparison, our results for the first quarter of 2022 reflected elevated consumer loan performance that followed the distribution of federal stimulus payments and enhanced unemployment benefits. Growth in consumer loan assignment volume as unit and dollar volumes grew 22.8% and 18.6%, respectively, as compared to the first quarter of 2022. The average balance of our loan portfolio on a GAAP and adjusted basis for the first quarter of 2023 increased 0.8% and 5.1%, respectively, as compared to the first quarter of 2022. The average balance of our loan portfolio on a GAAP and adjusted basis for the first quarter of 2023 increased 1% and 1.3%, respectively, as compared to the fourth quarter of 2022. The initial spread on consumer loans assigned in the first quarter of 2023 was 21% compared to 19.4% on consumer loans assigned in the first quarter of 2022 and 20.9% on consumer loans assigned in the fourth quarter of 2022. Growth in operating expenses of 14.4% as compared to the first quarter of 2022 primarily due to an increase in the number of team members in our engineering department as we are investing in our business to enhance our products and transform our technology systems to be more dealer and customer focused. Adjusted net income decreased 35.6% for the first quarter of 2022 to $127 million. Adjusted earnings per share decreased 29.4% from the first quarter of 2022 to $9.71. At this time, Ken Booth, our Chief Executive Officer; Jay Martin, our Senior Vice President of Finance and Accounting; and I will take your questions.

[Operator Instructions] Our first question comes from Moshe Orenbuch with Credit Suisse.

Doug, I was hoping you could just like kind of talk a little bit about -- you talked about stable collections but slower net cash flows. Just talk a little bit about what the 2 of those things -- what that means and how they affect the financials as we go forward.

Well, the stable net cash flows, all else equal, should be...

I think you said slower net cash flows, right, and stable collections.

Stable forecasted collection rates, I'm sorry. The stable forecasted collection rates, all else equal, will cause the yield to be more stable than it would have been if the forecasted collection rates have gone up or down. Obviously, what happens in future periods and the yield on new originations impact that as well. But it's nice to have stable forecasted collection rates after we had the last 3 quarters of 2022 where we had modest declines in forecasted collection rates. In terms of the slowing of the timing for the net cash flows, I mean, all else equal, that causes a decline in the yield on our portfolio because, obviously, cash flows coming in over a longer period of time mean less in current dollars than if they came in over a shorter period of time.

Got it. And the -- and which of those impacts caused the $44 million provision for forecast changes?

The slowdown in the cash flow timing.

Got it. Okay. And when you talk about the initial spread on the loans acquired in the period, like how do we think about that relative to changes in interest rates? Or how should we think about it?

What we're trying to do when we price our loans is we're trying to maximize the amount of economic profit, which is economic profit per loan times the number of loans originated. Economic profit considers the relationship between what we paid for the loan and what we expected to collect, how those loans perform over time and the anticipated expenses over the life of the loan, including interest expense. So if interest expense goes up, and we want to earn the same return, we need to lower advance rates assuming nothing else changed. So it's a long-winded answer to your question. It's an expense that needs to be factored into our pricing just like any other expense.

Our next question comes from Robert Wildhack with Autonomous Research.

I wanted to ask a question about unit originations. I think you'd said back in January that they were -- or from mid-February maybe, they were up 39% in Jan '23. And I think they finished up in the high 20s this quarter, which implies a decent slowdown in February and March. So just how much did unit origination growth slow in February and March? And then what do you think is behind that slowdown?

The growth rates by month in the quarter were 39% in January, 27% in February and 12% in March. I think a fair amount of the variability in growth rates during the quarter was primarily due to differences in the strength of prior year capitals. We had a bit of a soft January in 2022. February and March were certainly better. So I think that prior year comps had a fair amount to do with it.

Okay. And then industry-wide, I think things looked maybe the most stretched in '21 and then maybe into early '22. So coming up on 18 months from that point, and we see a lot of the headlines around delinquencies and losses in subprime auto broadly, to what degree do you think that your competitors and the industry have rationalized their underwriting?

The industry is very fragmented. So I don't have tremendous insight into how each industry participant is reacting to a more challenging credit environment. I can look at the industry statistics as published by AutoCount and see that more people appear to be tapping on the brakes than are pushing on the gas. So that would lead me to believe that most at least of the top 20 industry participants are getting incrementally more conservative.

Our next question comes from John Rowan with Janney.

Doug, you just gave a bunch of numbers regarding kind of the month by month. I think it was unit volume, correct? Was there any change in underwriting that -- obviously, you mentioned the year-over-year comps, and that's fine. But you did have a relatively big decrease in the advance rate here for the quarter. I'm wondering if there was any coincidence with a change in the advance rate and also the slower number for March.

We had a better number in April. I mean if you adjust for the number of days, it was 18%. So April was better than March. I mean as you rightly point out, the advance rate was lower in Q4, and it was lower in Q1. In general, the less you pay the dealers of origination, the fewer loans you originate. So that likely had some impact on volume.

Okay. And then obviously, the advance -- your initial advance rate for the year is 21%. It looks like it's the highest number since 2016. I'm wondering if -- maybe it's in the press release, haven't gone through to yet, but is there an initial advance rate for April?