Credit Acceptance Corp Q4 FY2021 Earnings Call

Good day, everyone and welcome to the Credit Acceptance Corporation Fourth Quarter 2021 Earnings Conference 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 Treasury Officer, Doug Busk.

Thank you. Good afternoon and welcome to the Credit Acceptance Corporation fourth quarter 2021 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 results for the quarter include unit and dollar volumes declined 22.6% and 12.7%, respectively, compared to the fourth quarter of 2020; an increase in forecasted collection rates for loans originated in 2019 and 2020. This resulted in a $31.9 million increase in the forecasted net cash flows from our loan portfolio. Adjusted net income increased 12% from the fourth quarter of 2020 to $212.6 million; adjusted earnings per share increased 33% from the fourth quarter of 2020 to $14.26; and stock repurchases of approximately 606,000 shares, 4.1% of the shares outstanding at the beginning of the quarter. At this time, Ken Booth, our Chief Executive Officer; Jay Martin, our Senior Vice President, Finance and Accounting; and I will take your questions.

The conference is now open for questions. Our first question is from Moshe Orenbuch with Credit Suisse. Your line is open.

Great. Thanks. A couple of things, I guess. First off, in the release, you talked about the January volumes as being down 36.8%, but you also mentioned that January 2021 was particularly strong. How should we think about that commentary? Was that just in January? Was that the rest of the quarter? Can you talk about that a little bit?

January, in a relative sense, was a pretty strong month last year. I think we were down 6% for the month of January versus the January of the prior year. The quarter was not that strong, but still better than the quarters we've experienced recently. And again, I believe that the strength in January of last year was due to stimulus.

Got it. Okay. And you mentioned the $31.9 million write-ups on the 2019 and 2020 vintages. As I look here, it says that there's a 0.3% reduction in your expected cash flows for the loans originated most recently?

Typically, if you look at the most recent quarter disclosed there will be a decline from our initial estimate. As you point out, in the fourth quarter of this year, the decline was 0.3%. A lot of that is just due to the fact that we don't remove canceled consumer loans from the denominator in calculating the ratio. That's disclosed in footnote one to the table on page 2. Generally what you see is the loan cancels occur early in the life of the loan. After that what has historically happened is the loans outperform and that becomes a positive number. That's what's happened historically. Whether that will be the case in Q4 we'll have to see.

Got it. Thanks. And then you mentioned the 600,000 and change shares that you repurchased. Could you talk a little bit about how you're looking at your leverage and what that might mean for your ability to buy back shares in the future?

We're continuing to think about stock buybacks the same way we have in the past. I want to make sure we have ample liquidity. If we have ample liquidity then I believe that purchasing shares is a good use of shareholders' money. We'll continue to invest in stock repurchases. Historically we've repurchased more stock when we're lowly leveraged than when we're highly leveraged. So I would expect that stock repurchases perhaps may not be as strong in the next couple of quarters as they were in the last half of this past year.

Got it. Thanks very much.

Our next question is from the line of David Scharf with JMP Securities. Your line is open.

Hello. Good afternoon and thanks for taking my questions. Maybe difficult to pinpoint, but as we think about the volume pressures on the entire industry, as well as specifically driven by these excessive used car prices, is there any metric or percentage decline in benchmarks like the Manheim or an ADA index that would signal a turnaround in consumer demand in your mind? For example, I'm looking six quarters back, your average contract size was 11% lower than it is now. Is there a decline in Manheim or average used car prices from today's level that you would feel comfortable would probably be signaling a turnaround to positive year-over-year growth in unit volume for both you and the industry?

No, I don't think you can say that there's a magic number out there with the Manheim or any other used car index. If used car prices remain stable or increase I think that's a bad thing from a volume perspective. If used car prices decline I think that's a positive, and the more they decline the better. But there's no magic number and no cliff where magically things go back to normal. I think it's just gradual.

Right. Clearly directionally we're kind of waiting for that turnaround. Do you have any commentary you are able to provide on your outlook for used car volumes, independent dealer health, and deep subprime demand throughout 2022?

I don't think that we have any unique insight there. I think your guess is as good as ours, David.

Our next question is from the line of Rob Wildhack with Autonomous Research.

Hi, guys.

Hi, Rob.

Can you just highlight or update us on what you're seeing competitively in the market?

Obviously, you can see our volumes are down. If you think about our marketplace I think a good way to look at it is looking at our volume per dealer. There's industry data that shows subprime is down. Volume per dealer kind of shows the strength of the competitive market.

When I think historically, any time the industry has had access to lots of capital and the cost of that capital is cheap it...

Pardon me, the speaker lines got disconnected. We'll give it a moment until they reconnect. Please stand by…

Are we live?

Yes, speakers, you are now back live.

This is Doug Busk. We're disconnected there. I'm not sure if my last response was completely heard or not, but I apologize for that.

Hey, Doug, this is Rob. Can you hear me? I'm not sure if I'm live either.

Yep, I can hear you.

You cut off right around when you were going into the point about when competitors have lots of access to capital and the cost of capital is cheap and that's when it dropped off.

Okay. Thanks for refreshing me. Generally when those conditions exist, the marketplace tends to be pretty competitive and the current environment is no exception. There's lots of companies out there with access to lots of capital at very low cost.

Got it. And then maybe to stick with that comment, do you think that a rise in interest rates here in 2022 would be enough to change competition, or do you need prevailing interest rates to be considerably higher than they are right now?

I think it's kind of like the used car price question. Every little bit helps, but I think rates would have to be substantially higher to have a meaningful impact.

And if I could ask one more on the consumer side, could you comment on the potential impact that inflation could have on consumers' ability to repay? Does inflation factor into your expected collections in any way?

No, it doesn't. We base our forecasted collections on how loans with similar attributes have performed historically. So we don't have a macroeconomic component that we overlay on that. If we have a period of significantly higher-than-normal inflation that has the potential to impact customers' ability to pay.

Our next question is from the line of John Hecht with Jefferies. Your line is open.

Thanks very much. You're thinking about volume: you touched on pricing and competition, but how much of your volume is impacted by just low overall inventory levels and other industry factors?

I think that's a significant factor impacting us right now. The most likely time there will be a turnaround for volume for us will be when vehicles are more readily available and prices stabilize and maybe go back to normal where they become a depreciating asset.

Do you have any thoughts from industry sources—off-lease supply, fleet sales, or repossessions—any sense for when that might start to occur?

We've spent a lot of time scouring information sources to learn about that, but there's a wide range of possibilities. I've seen reasonable sources predict later this year, and I've seen reasonable sources say it won't be until early 2024. There's a lot of uncertainty related to the downstream impact of the pandemic. Until cars are available, we're not really sure when that will be, but we still view it in the grand scheme of things as a temporary situation, not a permanent one.

And then your yields benefited this quarter from strong performance. Excluding the incrementally strong performance of some recent vintages, what do you think the GAAP yield on your portfolio would be as things normalize?

Are you talking about the GAAP yield or the adjusted yield? The GAAP yield is based off contractual cash flows, which we know we're never going to make, so we don't spend a lot of time focusing on it. The GAAP yield we're reflecting today is pretty close to the contractual yield on loans we're writing today, but because of CECL and the fact that our GAAP yield is based on contractual cash flows, it's not a primary focus for us.

Okay. That covers my questions. Appreciate it. Thanks very much.

Your next question is from the line of John Rowan with Janney Montgomery. Your line is open.

Good afternoon. Doug, you talked a lot about car prices impacting volume. I'm wondering what, if any, impact the duration reduction in the fourth quarter had on volume, and whether you were at 58 months again in January or if there was another duration cut in January affecting year-over-year performance.

I don't know what the duration is going to be in January. The reduction from 59 to 58 months was a function of car prices and affordability issues for consumers. I would expect that probably continued in January but I don't know for sure.

And then there was a relatively big increase in other income. Was there anything one-time in nature there, or what was driving that $18.3 million other income line?

It's primarily related to our ancillary product profit sharing. A lot of that is driven by claims rates. We did see lower claims rates in the fourth quarter. It's been volatile historically, so it's not necessarily a permanent change. I would consider it normal volatility within the profit sharing.

Okay. All right. Thank you.

Our next question is from the line of Vincent Caintic with Stephens. Your line is open.

Thank you. Just two quick ones. One follow-up: that other income line and the increase in ancillary profit sharing—because credit is better, should we expect that to continue, or is that a sort of one-time true-up this quarter?

I would say it's not related to credit and it's not necessarily a one-time true-up. It's primarily related to our GAP product and how claims rates have come in. Higher vehicle prices probably had some impact on claims rates. Historically, we've seen a fair amount of fluctuation in our claims rates over time, so consider it normal volatility.

Okay. And then second, on expenses: salaries and wages were up 46% year-over-year, but G&A expense was down 11%. How should we think about managing expenses going forward?

A lot of the increase in expenses, as we pointed out in the release, was related to stock compensation expense relating to stock options that were granted to the executive team as part of a new pay plan. That's really what's driving the vast majority of the increase in expense in the last couple of quarters.

So that would be for both salaries and wages?

Yes.

G&A on the other hand went down. What should we expect going forward in terms of efficiency?

Big picture, our expenses as a percent of revenue or expenses as a percent of average capital have declined over the long term as we've grown the business because we benefit from operating leverage. As we're in this period where we're not growing and average capital may be declining, it's logical to assume our operating leverage would be under pressure and could go the other way. The degree to which it does so will depend on what happens from a growth perspective.

Okay, that makes sense. Thank you. That's all I had.

With no further questions in the queue, I will now turn the conference back over to Mr. Busk for any additional or closing remarks.

We'd like to thank everyone for their support and for joining us on our 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.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.