Good day, everyone and welcome to the Credit Acceptance Corporation’s First 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’s website. At this time, I would like to turn the call over to Credit Acceptance’ Chief Treasury Officer, Doug Busk. Sir, the floor is yours.

Thank you. Good afternoon and welcome to the Credit Acceptance Corporation first 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 results for the quarter include unit and dollar volumes declined 22.1% and 10.5%, respectively compared to the first quarter of 2021. An increase in forecasted collection rates for loans originated in 2016, 2017 and 2019 through 2021, which increased forecasted net cash flows from our loan portfolio by $110 million. Adjusted net income increased 20% from the first quarter of 2021 to $197 million. Adjusted earnings per share increased 43% from the first quarter of 2021 to $13.76. Stock repurchases of approximately 802,000 shares, 5.7% of the shares outstanding at the beginning of the quarter. At this time, Ken Booth, our Chief Executive Officer; J. Martin, our Senior Vice President, Finance and Accounting, and I will take your questions.

Thank you. Our first question comes from Moshe Orenbuch of Credit Suisse.

Great – thanks – thank you very much. Doug, you mentioned the improved cash flows and then there was a note that you also kind of removed the COVID overlay forecast. Could you just talk about you know are those the same thing or are they different things and how that runs through the financials? Just help us understand. Thanks.

Sure. We have a little more detail on Page 3 of the release. We did two things during the quarter. One, we felt we had sufficient data since the end of stimulus and the end of enhanced unemployment benefits to basically remove the COVID adjustment from our forecast. Again, our objective is always to forecast future cash flows as accurately as possible and we felt that the COVID adjustment was no longer necessary. Additionally, every couple of years we go through a process where we seek to enhance our forecasting methodology. We did that this quarter, utilizing some additional data and some new forecast variables. The COVID forecast adjustment increased the forecasted net cash flows by about $150 million, enhanced forecasting methodology, decreased it by $54 million for a total positive change of $96 million. The way that you know those would flow through our GAAP financials would be, you know, a reversal of the provision as indicated on Page 3 of the release in our adjusted results, those changes would be reflected as a prospective yield adjustment that would impact our finance charges over time.

Great. Is there any way to kind of just flesh out a little more of what kind of enhanced methodologies caused that $54 million there, you know, kind of reduction in future cash flows?

Moshe, you know we don’t want to get into too much detail there. It's something we do every couple of years. And it’s you know we have more recent data to rely on and we’re always looking at new variables that we can incorporate in the forecast. So it just – it’s something that we do you know periodically and you know when you consider we’re forecasting $9 billion in forecasted net cash flows it’s not a really big change.

Right, got it. And when you think about the fact that the kind of expected, you know your expected cash flows for that you know loans originated in 2022 are lower. Is that the reason? I mean, is it the reason because of that enhanced methodology or?

Not it really has – it really has nothing to do with the new loans. It’s just based on, you know, the existing loans in the book and what we believe is a better estimate.

Got it. As we think about stock-based compensation after the annual meeting, any sense of the amount we should be adding to the expense line?

You know we had about $9 million in stock-based compensation this quarter, that was down from about $19 million in Q4. On my Page 39 of the Q footnote 14, we have a footnote that shows that we expect to recognize $26.3 million in stock capital over the remainder of the year.

Remainder of the year, perfect. Okay, thanks a lot.

You bet.

Thank you. Our next question comes from Arjun Tuteja of Jarislowsky, Fraser. Your line is open.

Hey, so this question is for Ken. You mentioned in the annual letter that we rolled out a financing program for consumers with higher credit rating. Can you share some more information there, kind of you know what’s our competitive advantage? What are we doing differently? Any information on that program would be helpful.

Okay. Yeah we’re just really, you know, it’s an internal initiative designed to capture consumers with just a slightly better credit profile. It’s something we think we can be profitable at, and it’s – makes our product more valuable to the dealers. So it’s a way to get more volume. It’s been modestly successful so far, we believe, about 15% of our volume. So, that’s what I’ll have to say about that at this point.

Okay. And are these loans also offered under the portfolio program? Or is it more like purchased loans?

They’re offered under both programs.

Okay, okay. And what’s the kind of, you know, say, return on equity or return on assets we are able to generate? Because, I mean, the thinking is that, as we go up around the credit spectrum, the competition increases, right? Because there are many players who are trying to kind of get those loans because those are at lower risk. So are we able to get the high profitability which we usually make from our, you know, legacy loans?

We don’t really talk about pricing and how much we’re going to make on various programs. I will say our overall goal is to maximize the economic profit in the long run. And we feel like this program is consistent with that objective.

Okay, thank you.

Thank you. Our next question comes from Rob Wildhack of Autonomous Research. Your line is open.

Good evening, guys.

Hello, Rob.

I wanted to ask you about the unit originations in the quarter. You know based on where January was and where the quarter finished, it seems like there was some notable improvement in February and March. Can you talk about what was driving that improvement?

Well, I think as we pointed out in our Q1 release, we had a tough comp versus January of last year due to federal stimulus dollars. You know comparing the rest of the quarter was a little bit difficult. February is very good. But I think there are differences in the timing and tax season, and then in March we had another tough comp due to stimulus dollars last year. I think you know a relevant data point is, you know we pointed out in April, that volumes are tracking better, down about 14%. And that the trend in April was encouraging. So there’s a long-winded answer. There’s a bit of noise in the quarter. You know so I think that the April data point is a relevant one.

Okay, thanks. And then you know last time we spoke, I think the message or I thought the message was that the buyback probably wouldn’t be able to continue at the pace it had in the later quarters of 2021. But this quarter with 800,000 shares repurchased was strong again. So can you just talk about what went into that and what your outlook is for any future buybacks?

I mean you know we continue to think about buybacks the same way. We would prefer to invest our capital in new loan originations, because we think that’s what’s best for shareholders. But if we can’t you know deploy our capital in loan originations at returns that we’re happy with and we can buy the stock at an attractive price. You know that’s what we do. You know I think that you know last quarter I was asked about as our leverage increased, what that means for future stock repurchases. And you know I think you can look back and see that you know historically when we’re lowly leveraged all things equal, we tend to buy more shares. And you know when we’re more highly leveraged, we tend to purchase fewer shares and you know we’re at the – you know higher end of the historical range today. You know so you can draw your conclusions from that.

Okay, thanks.

Thank you. And next we have Alexandra Villalobos of Jefferies. Your line is open. Mr. Villalobos, if your phone is on mute, please unmute your line.

Perfect, sorry. Thank you guys for taking my question. Did want to ask a little bit more about the – just like write-offs and recoveries. How you know maybe like dollar amounts and how these performed you know versus prior quarters? Thank you.

When I think the best way to think about credit quality is, you know, just looking at you know the table on Page 2 of the release that compares our initial forecast you know to our most recent forecast, and you can see you know for the last you know 10 years, on average, we’ve been pretty close. But we have you know four years that have underperformed our initial expectations, and the remainder have performed better than our initial expectations. I think that’s the simplest lens through which to view credit quality. I think the – you know if you look at the – roll forward of loans receivable you know the adoption of CECL has had a significant impact on the way we provision and the amount of write-offs we will occur. And under CECL you know our write-offs are going to be you know higher than we were historically, either because we have the – you know gross asset or the – we have an asset on the balance sheet that includes the amount we never expected to collect or because we’re you know recognizing revenue with the contractual yield as opposed to the yield we expect to earn. So the – drawing conclusions about credit quality by looking at the you know write-offs post adopting CECL, it’s tough to draw any clear conclusions there. So, I’d just direct you to the table that I mentioned.

Perfect, thank you.

Thank you. And we have a follow-up question from Rob Wildhack of Autonomous Research. Your line is open.

Thanks for taking the extra question. Ken, I wanted to ask you about the shareholder letter. I thought there was a big emphasis on technology going forward? Can you talk in a little more detail about the kinds of improvements you want to make? What those might do you know in terms of expenses or the investment required? And what kind of benefit you think you’ll ultimately receive from them?

Yeah, I mean, obviously the business models changed over the years, where technology is becoming more and more prevalent. We have invested in – you know we’ve hired, as you might have saw in our announcement, we’ve hired a Chief Marketing and Product Officer, who hopefully will help lead our efforts and be a little innovative and making our product even more valuable to our dealers. So we’re continually looking for ways to improve the business. But really, you know, it’s, as we invest in technology, you know it’s hard to say what we’re going to spend on it, but we expect to get a return on it. So it’s truly just an investment in our future. But I don’t really have hard data I want to share, you know, I don’t know how that’s going to play out. But the belief is the more valuable we can make the product to the dealer, ultimately the better business we make for ourselves and for the shareholders.

Okay, thank you.

Thank you. With no further questions in the queue, I would like to 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 [email protected]. We look forward to talking to you again next quarter. Thank you.

Once again, this does conclude today’s conference. We thank you for your participation and have a nice day.