Credit Acceptance Corp

NASDAQ:CACC

Earnings Call Analysis

Decrease in Q4 Earnings and Collections, Costs Up

Credit Acceptance's Q4 saw a downturn, with adjusted net income dropping 17% to $129 million and earnings per share decreasing 14% to $10.06. Forecasted cash flow from loans fell by $57 million, a 0.6% dip due to lower collection rates. Despite this, the loan portfolio's average balance hit a record high, growing between 9% and 13%. The initial spread on consumer loans edged up from 20.9% to 21.7%. A rise in the average cost of debt stemmed from hikes in interest rates and paying off older, cheaper financings.

Financial Performance Decline Amid Increasing Volume and Portfolio Size

The fourth quarter of 2023 presented a mix of challenges and growth for Credit Acceptance Corporation. Notably, there was a 17% decline in adjusted net income to $129 million and a 14% decrease in adjusted earnings per share, landing at $10.06. A key concern was the decrease in forecasted collection rates, which led to a $57 million, or 0.6%, reduction in forecasted net cash flows from the loan portfolio. Adding to this, the profitability forecast for consumer loans originated between 2020 and 2022 was adjusted downward from previous estimates due to declining collection rates. These indicators suggest a cautious outlook on loan performance and repayment rates.

Growth Amidst Reduced Forecasted Net Cash Flows

Despite reduced forecasts, the company experienced significant growth in unit and dollar volumes, which surged by 26.7% and 21.3% respectively compared to the fourth quarter of 2022. This growth coincided with the average balance of the loan portfolio reaching its highest level ever, increasing by 9% and 13% on a GAAP asset basis compared to the same period in 2022. However, this expansion comes with the concern of slower forecasted net cash flow timing for 2023, primarily due to a decrease in consumer loan payments falling below historical average levels.

Margin Pressures and Interest Rate Environment

Credit Acceptance Corporation also faced margin pressure. The initial spread on consumer loan assignments increased to 21.7%, compared to 20.9% for loans signed in the fourth quarter of 2022. Alongside spread increases, the average cost of debt increased, influenced by prevailing market interest rates and financial strategy decisions. Specifically, the Q4 interest rate rose to 6.3% from 5.8% in the previous quarter, and with a $600 million senior note issuance not fully impacting Q4, expectations are set for even higher rates going forward.

Adjustments in Yield Expectations and Share Buyback

The adjusted yield for the company experienced a dip to 17.9% in Q4 from 18.5% in Q3. This trend poses questions regarding future profitability expectations, potentially requiring the company to adapt through either accepting lower returns or recalibrating the relative anticipated net cash flows tied to the pricing of loans. In response to these conditions and considering the company's growth, it appears that share buybacks have been tailored to safeguard capital necessary for funding expected loan originations, although specifics were not explicitly detailed in the summary reviewed.

Competitive Environment and Operational Strategy

Amidst these conditions, the company maintains a positive outlook on the competitive environment, suggesting stability and potential for dealer productivity, even as new dealer enrollments may be less productive than seasoned dealers. This nuanced understanding of the operational landscape accompanies the reported 21.5% growth in volumes during the first 30 days of January 2023, indicating sustained growth momentum into the new year.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, everyone, and welcome to the Credit Acceptance Corporation Fourth 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's website.

At this time, I would like to turn the call over to Credit Acceptance's Chief Financial Officer, Jay Martin.

[Jay Martin, executive]

Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation Fourth Quarter 2023 Earnings Call. As you read our news release posted on the Investor Relations section of our website at ir.creditacceptance.com, 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.

At this time, I will turn the call over to our Chief Executive Officer, Ken Booth, to discuss our fourth quarter results.

[Kenneth Booth, executive]

Thanks, Jay. Our GAAP and adjusted results for the quarter include: adjusted net income of $129 million, which is a 17% decrease from the fourth quarter of 2022. Adjusted earnings per share of $10.06, which is a 14% decrease from the fourth quarter of 2022.

In terms of collections, we had a decrease in forecasted collection rates that decreased forecasted net cash flows from our loan portfolio by $57 million or 0.6% compared to a decrease in forecasted collection rates during the fourth quarter of 2022 that decreased forecasted net cash flows from our loan portfolio by $41 million or 0.5%. We also had forecasted profitability for consumer loans ascended in 2020 through 2022 that was lower than our estimates at December 31, 2022, due to a decline in forecasted collection rates since the fourth quarter of 2022.

Also, we have slower forecasted net cash flow timing during 2023, primarily as a result of a decrease in consumer loan payments -- to below historical average levels. From a growth standpoint, unit and dollar volumes grew 26.7% and 21.3%, respectively, compared to the fourth quarter of 2022. The average balance of our loan portfolio is now the largest it has ever been. On a GAAP asset basis, it increased by 9% and 13%, respectively, as compared to the fourth quarter of 2022.

Our results also included an increase in initial spread on consumer loan assignments to 21.7% compared to 20.9% on consumer loans signed in the fourth quarter of 2022. And an increase in our average cost of debt, which was primarily due to higher interest rates than recently completed or extended secured financing and the repayment of older secured financings with lower interest rates.

At this time, Doug Busk, our Chief Treasury Officer; Jay Martin and I will take your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Moshe Orenbuch of TD Cowen

[Moshe Orenbuch, analyst]

Great. Gentlemen, if you could just talk a little bit about the competitive environment and kind of how you see it at this stage reflected in the trends that you're seeing.

[Kenneth Booth, executive]

We feel pretty good about the competitive environment. Volume per dealer is a good metric to reflect the intensity of the environment, an increase -- despite the increase in dealer enrollments, new dealers are generally less productive for season dealers. But that is just our overall growth rate was very high for the quarter and for the 30 days subsequent to year-end.

[Moshe Orenbuch, analyst]

Yes. I didn't see the January, were the January numbers in the release for volumes?

[Douglas Busk, executive]

Yes. Yes. It was 21.5% for the first 30 days.

[Moshe Orenbuch, analyst]

At the same time, interest rates have been up a lot. And could you talk a little bit about how the financing you did during Q4 are going to impact interest expense? And is there a way to relate that to the amount of spread that you need to pick up to offset that?

[Douglas Busk, executive]

I mean the interest rate in Q4 was 6.3% versus 5.8% in Q3. That obviously doesn't include a full quarter of the $600 million senior note issuance. So all things equal, I expect that number would be even higher going forward. What we try to do when we price our loans is maximize the amount of economic profit, that's economic profit for long times the number of loans. And in doing that, consider the anticipated expenses were going to occur over the life of the loan, including interest, sales and marketing, G&A and salaries and wages. So as interest or other expenses go up, we either need to be satisfied with lower return or reduce as relative to the anticipated net cash flows.

[Moshe Orenbuch, analyst]

Got it. And you did note that there was another kind of write-down for forecast changes in the quarter. Can you talk a little bit about how that will affect the adjusted yield as we go forward?

[Douglas Busk, executive]

I mean the adjusted yield declined to 17.9% in Q4 from 18.5% in Q3. What happens in Q1 will be dependent on the yield on new loan originations and old performance in Q1. But all else equal, if nothing else changed, you would expect a decline in forecasted net cash flows in Q4. It's put a bit of further pressure on the adjusted yield in Q1. But again, that make some big assumptions about all else equal.

[Moshe Orenbuch, analyst]

Got you. And then just last one for me is, fourth quarter, we don't get the 10-Q. So it looks like you bought back 44,000 shares. Is that math correct? Like is that the right amount?

[Douglas Busk, executive]

I mean I think we bought approximately 100,000 shares back, a little over 100,000.

[Operator]

[Operator Instructions] Our next question comes from the line of Robert Wildhack of Autonomous Research.

[Robert Wildhack, analyst]

A question on the forecast and collections and adjusted yield as well. First, what's behind the continued drop in forecasting collections? Is there anything specific that you'd highlight there? And then do you have any insight or thoughts on when that could ultimately bottom?

[Douglas Busk, executive]

I mean I think it's -- the reason for the loan performance being worse than initially expected as a combination of things, including the fact that those loans were originated in a very competitive period with [ Curt's ] loan performance those consumers finance vehicles at relatively peak valuations. I think the inactive inflation on the consumer has also contributed. It's impossible to say when loan performance will level out. If I look at the 2015 book of business, it leveled out after this point. I mean it's still declined, but at a slower rate, whether that pattern will hold true on the '22 business remains to be seen. But absolutely at some point, it will level out. It's just difficult to say precisely when.

[Robert Wildhack, analyst]

Okay. And then could you speak to the current leverage level and your capacity to both continue to keep -- to continue buying back shares and also continue growing at this current pace?

[Douglas Busk, executive]

Our leverage on an adjusted basis is within the historical range. So we're very comfortable with where we are today. Obviously, our GAAP leverage is different. And it's an apples towards just comparison of pretty 2020 to today's leverage. But on a consistently applied basis, our leverage is within the historical norm. The way we think about buybacks is our first priority is always to make sure that we have the capital that we need to fund anticipated levels of loan originations. So what that means is we're growing faster, all else equal, we buy back less stock. That doesn't mean we don't buy any, but it means we buy back less.

[Operator]

Our next question comes from the line of Vincent Caintic of Stephens.

[Vincent Caintic, analyst]

First one, so you highlighted that the average loan balance as high as it's been in the loan terms have also been increasing. Just wondering if you're kind of comfortable with those ranges, you take them higher? And if there are any other adjustments that you are thinking about when you think about underwriting?

[Douglas Busk, executive]

I mean the consumer loan balance was pretty flat on a year-over-year basis. Loan term was up a month. So I don't think there's been a dramatic change over the last couple of years.

[Vincent Caintic, analyst]

Okay. And then on for the forecasted collections. I'm wondering if there's any macro assumptions that are baked into there, I guess the -- for instance, the Manheim index with used car sales and used car prices or Fed rate cuts or anything like that. I don't know if that has any influence on your forecasted collections. So if you could talk about that.

[Douglas Busk, executive]

We don't include macro variables like unemployed rates or inflation rates or GDP or anything like that. We do have depreciation curve that we end up using to model forecasted collection rates. So that's factored in. But no one really knows what is going to happen to used vehicle prices over a 60-month loan term. So the way that we deal with uncertainty associated with used car prices and all the other uncertainties is just by building up pretty significant margin of safety into our loan pricing when they are originated. We do that. So even a loan performance is worse than expected. -- our loans are still likely to produce that effective levels of profitability.

[Vincent Caintic, analyst]

Okay. And last one for me. So I understand you have forecast collections and maybe change underwriting or change some variables to get to your desired results. But when you think about the consumer that you're lending to just if you can -- if you have any views about how that consumer health is doing, are trends getting better as you -- over the past couple of quarters?

[Douglas Busk, executive]

It's pretty early to say. Thus far, the 2023 loans are performing better at the same age than the 2022 loans were. But again, that book of business realized all that season. We have made adjustments as we've seen the underperformance of the '21 and '22 loans. We've incorporated -- we're always making changes to our forecast based on recent trends and loan performance. So we have made adjustments to our forecast there. But I think it's too early to have a conclusive comment on consumer health.

[Operator]

With no further questions in the queue, I would like to turn the call 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 [e-mail]. 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.