Credit Acceptance Corp

NASDAQ:CACC

Earnings Call Analysis

Earnings Call Transcript 2024-Q3

[Operator]

Good day, everyone, and welcome to the Credit Acceptance Corporation Third 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 would like to turn the call over to Credit Acceptance Chief Financial Officer, Jay Martin.

[Jay Martin, executive]

Thank you. Good morning, and welcome to the Credit Acceptance Corporation Third Quarter 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 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 filed 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 the third quarter results.

[Kenneth Booth, executive]

Thanks, Jay. Overall, we had another mixed quarter as it related to collections and originations, 2 key drivers of our business. Our 2022 vantage continued to underperform our expectations and 2021, 2023 and 2024 also declined. Overall, a modest decline of 0.6% or $62.8 million in forecasted net cash flows.

As we have previously communicated, historically, our models are very good at predicting loan performance in aggregate, but our models work faster in less volatile times. The pandemic and as ripple effects created volatile conditions, federal stimulus, enhanced unemployment benefits and supply chain disruptions led to vehicle shortages, inflation, et cetera. All of which impacted competitive conditions. We had larger-than-average forecast misses both high and low during this volatile period. 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. Even our worst benefits 2022 is still forecasted to produce economic profit. As I've explained in the past, we are less reactive to changes in competitive and economic cycles and others in the industry because we take a long deal in the industry. We priced to maximize economic profit over the long term and seek the best position of 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. While our market share was lower during those years, we believe this was us 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 dollar volume ever, growing our loan and our loan unit and dollar volume by 17.7% and 12.2%, respectively. This is our ninth quarter in a row with double-digit unit volume growth. Our loan portfolio is now at a new record high of $8.9 million on an adjusted basis, up 18.6% from Q3 2023. Our market share in our core segment was 6.2% end of August 31, 2024. 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 continued making progress during the quarter towards our mission of creating intuitive value and positively changing the lives of our 5Cs 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 with roughly 55% of adults other than prime credit. For these adults, it enables them to obtain a vehicle to get to their jobs, take their kids to school, et cetera. It also gives them the opportunity to improve or build their credit. We recognize that it has been a challenging time for our consumers impacted by rates and 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 $1.3 billion overall and paid $71 million of portfolio profit spread to our dealers. We added 1,038 new dealers for the quarter and now have our largest number of active dealers ever for our third quarter with 10,678 dealers. From an initiative perspective, we are committed to improvement through our go-to-market approach and is providing product innovation and support to our dealers faster and more effectively than ever before. This requires skill work, attention to detail and iterate process that tends 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. We've improved our team's capabilities and are focused on modernizing both our key technology architecture, and how our teams 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 Borgen, 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 the difference of that. In connection with their efforts, we contributed to organizations such as [indiscernible] to strong, American Foundation pursuit prevention, the Atlanta area School District, Children Hospital in Michigan and the Pure Heart foundation.

Now Jay, Martin and I will take your questions along with Doug Lusk, our Chief Treasury Officer. Jay Brinkley, our Senior Vice President and Treasurer; and Jeff Soutar, our Vice President and Assisted Treasurer.

[Operator]

[Operator Instructions] Our first question comes from Moshe Orenbuch with TD Cowen.

[Moshe Orenbuch, analyst]

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?

[Kenneth Booth, executive]

Yes. So our estimates in our third quarter 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 to date on post-pandemic vintages. To your point about what we expect to see in the future, I would say our forecasting models performed faster and relatively stable economic periods whether as concept are less accurate during periods of volatility like we've experienced since the hand on it.

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 long performance. 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 softens.

As it relates to the '21 and '22 business, just we'd point out that those -- that business is more seasoned. We've climbed to 81% of what we ultimately expect to collect on the '21 business, 61% of what we ultimately expect to collect the '22 business -- going forward, those cohorts are going to have less of an impact on our financial results. We're going to have more of an impact on our financials based on how our '23 and '24 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 '25.

[Moshe Orenbuch, analyst]

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?

[Kenneth Booth, executive]

Well, I'd 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 '21 and '22 loans. So we've adjusted and lowered our initial estimate on this future allows us to consider that. So we believe we are considering the other performance there. And as I mentioned before, we don't believe this is a problem unique to Credit Acceptance, we believe we're seeing this across the industry. The quarter we move it forward.

[Moshe Orenbuch, analyst]

All right. And then just last 1 for me. You didn't buy back any stock in the third quarter 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?

[Douglas Busk, executive]

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 in terms of value, we'll return capital to shareholders.

For most of Q3, we had higher outstanding balances on our revolving credit facilities that we customarily do. Now that situation was remedied at the very end of September will be 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've repurchased a significant number of shares over a long period of time, over 30 million shares since the late 90s. But we don't do it consistently. In some periods, we buy back a lot. So 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.

[Operator]

Our next question comes from the line of John Hecht with Jefferies. [Technical Difficulty]

Our next question will come from -- we have a question from the line of John Rowan with Janney Montgomery Scott.

[John Rowan, analyst]

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 lower wholesales after repossession. But I guess, drill down a little bit, like what is it? Is it -- are you not getting the judgments you need when you go and you see 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? So I'm just trying to get a better understanding of what that fairly generic term means.

[Kenneth Booth, executive]

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 is limited availability of the credit to consumers, we tend to see lower levels of prepayments, and that's what we're currently seeing now.

[John Rowan, analyst]

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? And to consumers, I mean, even much worse than right now, how does that compare historically to those periods?

[Kenneth Booth, executive]

I would say we're in 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 area which will be seen with prepaid mix and we've seen that come down, which pushes our cash flow down to the future, which lowers the yield that we'll realize on the loans.

[Douglas Busk, executive]

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 competitive environment is going to behave in the future. So it is challenging. I think we take our best crack at it, but it is tough.

[John Rowan, analyst]

Actually, let me ask 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?

[Douglas Busk, executive]

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 fact as you mentioned are contributing factors.

[Operator]

Our next question comes from John Hecht with Jefferies.

[John Hecht, analyst]

I apologize for the technical issue earlier. I just kind of follow-on questions for both the preceding questions. Is -- 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 environment for you as an example, thinking about post the great financial crisis. 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 in an opportunistic environment for you? Is it simply just work through the '22 vintage? Do residual prices need to come down further? Or what other factors might we look out for?

[Douglas Busk, executive]

Yes. I think it's primarily continuing to adjust our low 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 '22 loans have a less significant impact on our financial statements going forward. Our results will be more based on how our '23 and '24 business performance and going into the next year, how our '25 business performs.

But we -- as Ken mentioned, we know that forecasting collection rates are difficult. So we have a business model designed to produce acceptable returns in aggregate, even if low performance is worse than forecasted. So we'll continue to take that approach as we move forward.

[Operator]

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

[Robert Wildhack, analyst]

Question on the '23 and '24 vintages specifically. The second quarter earnings, I think you mentioned that you expected '23 and '24 to behave similarly to '22. As it stands today, though, forecasted collections are 4 and 6 percentage points higher for '23 and '24, respectively, versus '22. How should we square that difference? Do you think there's another shoe to drop with respect to '23 and '24? And if so, when do you think that could happen?

[Kenneth Booth, executive]

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 what you need to look at our variance to our initial forecast. And you'll see that's currently lower on the '23 and '24 loans. And part of that is due to us having lowered our initial estimates on the '23 and '24 loans when we have originated that because we started to see some underperformance on the '21 to '22 loans, we consider that.

And then we're also looking at the trends of what '23 has done so far versus '22, and we know those loans performing better. So based on those 2 factors, we believe that the '23 business and the '24 business performed better than the '22 business. But I would also point out, especially the '24 business, it's not very seasoned at this point.

[Douglas Busk, executive]

Yes. And I would just add that we said in prior calls that we were observing a similar trend in underperformance on the '23 and '24 loans. So that trend was less severe on the '22 loans. So we are seeing a similar pattern but less severe. And then to Jay's point, we've adjusted our forecast or our forecast on '23 and '24 was more conservative than '21 and '22.

[Robert Wildhack, analyst]

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

[Kenneth Booth, executive]

No, the hurricanes impacted mainly Florida and North Carolina. Those 2 things are about 4.2% with 1.5% of our portfolio. But obviously, the hurricanes didn't impact the entire state. So overall, they're really not that material impact both to our portfolio. That said, they've been incredibly impactful to people in the direct path. 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.

[Robert Wildhack, analyst]

Okay. If I could just sneak 1 more in and ask, Ken, about something you highlighted earlier, specifically that 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?

[Douglas Busk, executive]

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

[Operator]

[Operator Instructions] Our next question comes from the line of Ryan Shelley with Bank of America.

[Ryan Shelley, analyst]

A quick question here. So the active dealer count has come down a 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? Just any color there would be great.

[Douglas Busk, executive]

I think at the dealer counts, it is fairly flat, to be honest, it was higher in the first quarter 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's subsided somewhat. And maybe the competitive environment is returning more to a normal environment. However, that 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. So it I feel good about where we're at in terms of the competitive environment and how we're able to grow the business.

[Ryan Shelley, analyst]

Got it. Got it. And then I guess 1 more quickly, if I could see a maturity in March 26, but it's callable at par now. How should investors think about thought process around addressing that? .

[Vincent Caintic, analyst]

Yes. We're watching market conditions there very closely. Two good facts with that bond tranche. First, we have plenty of time. It doesn't mature until March of 2026. So 1.5 years to do something. The other good fact there is relatively small, $400 million, so it's small relative to the size of our balance sheet and our liquidity. So we have plenty of options. We can refinance it in the senior no 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. So we'll continue just to monitor it and do something appropriate before the maturity.

[Operator]

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

[John Rowan, analyst]

Just 1 follow-up. The 2022 vintage is now sitting at a 13.2% spread versus an initial of 20.1%. 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 a proxy for the internal rate of return to that pool. Or do we just look at that number to go down to the your funding costs? Or where does that number become uneconomical to you?

[Douglas Busk, executive]

I mean it depends on which program you're talking about. So on the purchase program, 1% decline in the forecasted collection rate then on your tax effect 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 an 80-20 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.

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.

[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.

[Jay Martin, executive]

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 ir.creditacceptance.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.