Earnings Call Transcript - CACC Q3 2023

Operator, Operator

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

Douglas Busk, Chief Treasury Officer

Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation third quarter 2023 earnings call. As you read our news release posted on the Investor Relations section of our website, 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 statements 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 a decrease in forecasted collection rates, a decreased forecasted net cash flow by $69 million or 0.7% compared to a decrease in forecasted collection rates during the third quarter of 2022, that decreased forecasted net cash flow by $87 million or 0.9%. Forecasted profitability for consumer loans assigned in 2020 through 2022 that was lower than our estimates at September 30, 2022 due to a decline in forecasted collection rates since the third quarter of 2022 and slower forecast net cash flow timing during 2023, primarily as a result of a decrease in consumer loan prepayments to below average levels. Unit and dollar volumes grew 13% and 10.5% respectively as compared to the third quarter of 2022. The average balance of our loan portfolio on a GAAP and adjusted basis increased 5.9% and 10.6% respectively as compared to the third quarter of 2022. An increase in the initial spread on consumer loan assignments to 21.4% compared to 20.2% on consumer loans assigned in the third quarter of 2022. An increase in our average cost of debt, which was primarily a result of higher interest rates on recently completed or extended secured financing and the repayment of older secured financings with lower interest rates. Adjusted net income decreased 22% from the third quarter of 2022 to $140 million. Adjusted earnings per share decreased 20% from the third quarter of 2022 to $10.70. At this time, Ken Booth, our Chief Executive Officer; Jay Martin, our Senior Vice-President, Finance and Accounting, and I will take your questions.

Operator, Operator

Thank you. Our first question comes from John Rowan of Janney Montgomery Scott.

John Rowan, Analyst

Good afternoon.

Douglas Busk, Chief Treasury Officer

Hey, John.

John Rowan, Analyst

So when I think back, overall long timeframe and looking at the company and every cycle that we've seen, whether it was the Great Financial Crisis or COVID, it was roughly about three quarters of charges that you took to kind of right-size the forecasted collections. And then obviously—and then after that, those forecast revisions went away. We're at six quarters now in a row of forecasted collection revisions on the downside. Is there something different about this environment that makes it more difficult to get that number right? Is it still COVID reverberations? Is it CECL or is it car prices? I'm just trying to figure out why we're so much longer into the cycle and we're still seeing these negative charges? Thank you.

Douglas Busk, Chief Treasury Officer

Yeah. I don't—it doesn't have anything to do with CECL. I mean, that's just accounting. In terms of estimated forecasted collection rates, I don't have a perfect reason for why it's taken longer for the '22 cohort in particular to settle in. Those loans were originated in a pretty unique time, very competitive in the industry yet very elevated used car prices. And we have had the impact of inflation, which was something that we've never previously had to deal with. So that's really one of the best answers I can give you.

John Rowan, Analyst

Okay. And then just obviously I saw the Q came out, and it doesn't seem like there are any material disclosures regarding the CFPB and New York AG suit, but it does say there was an update that has to be given on November 3. Is there anything you can tell us about what that update would include or is that a possible timeframe in which this case would move forward again, because obviously, it's still currently staged. Just want to understand what happens on November 3? Thank you.

Douglas Busk, Chief Treasury Officer

Yeah. I don't think that anything is really going to happen with the case until the CFPB or the Supreme Court rules on the constitutionality of the CFPB. The court has granted a motion to stay our case while pending that decision. So, I don't know exactly what will be discussed in early November with the court. What I do know is that the court has granted a motion to stay pending the Supreme Court's decision.

John Rowan, Analyst

Okay. All right. Thank you.

Operator, Operator

Thank you. One moment for our next question. And our next question comes from John Hecht of Jefferies.

John Hecht, Analyst

Hey, guys. Good afternoon. Thanks for taking my question. I mean, I guess it's—my question is a little bit related to John's prior question, just because this is a longer cycle. In prior cycles, you guys have kind of emerged as a price maker as other competitors have fallen back. But if you look at the spreads that you're issuing now, they're still kind of below where they were even a few years ago. I'm wondering how you would describe the competitive market, and is there something that you would see in the future or any indications that it may be coming more favorable because we've gone through such a tough cycle for a period of time.

Douglas Busk, Chief Treasury Officer

I think we believe the competitive environment is relatively favorable today. We grew the loan portfolio, we grew originations in Q3 at rates that we're happy with. Volume through the first 28 days of October is up materially. So, I think the competitive environment is favorable. The October volume would indicate that it's even more favorable recently. It's certainly not a situation like that, that existed during the credit crisis when the industry really didn't have access to capital for a period of time. But I think the competitive environment is certainly better than it was a year ago. And I don't know how that's going to play out in the future, but we're pleased with how it's going to date.

John Hecht, Analyst

And then just, I guess, maybe comment on obviously you're writing down the expected cash flows at kind of fits and spurts over the past few quarters. Can you just discuss the credit environment? Is it a consumer that's just been exhausted by inflation or is it because—is it more tied to asset values in the market? How do you describe the credit and the consumer's ability to service their debts right now?

Douglas Busk, Chief Treasury Officer

I think it's a combination of several factors; probably the two that you mentioned, asset values and inflation, would be the two most material contributors.

John Hecht, Analyst

Okay. Thanks very much, guys.

Operator, Operator

Thank you. Our next question comes from Robert Wildhack of Autonomous Research.

Robert Wildhack, Analyst

Hi, guys. Just to follow up on the last point there. Why do you think the competitive or what's the reason behind the improvement in the competitive landscape? Is that structural—in other words, competitors going out of business or is that temporary, i.e., something just pulling back for a bit?

Douglas Busk, Chief Treasury Officer

There have been some companies that have gone out of business or exited the market, but they haven't been huge participants in used vehicle financing to sub-prime consumers. So I think it's just more a function of other industry participants having to price their loans differently due to the increase in interest rates. I think people are also probably reacting to softness in credit performance.

Robert Wildhack, Analyst

Okay. And then as it relates to the downward revisions in forecasted collections, have you adjusted your approval rate at all in the recent quarters, and did you change your approval rate at all in October?

Douglas Busk, Chief Treasury Officer

We haven't seen a material—I mean, we approve everyone. So we haven't seen a change in our approval policies. And we haven't made any meaningful changes in policy or price in October.

Robert Wildhack, Analyst

Okay. No change in October.

Douglas Busk, Chief Treasury Officer

No material changes. No.

Robert Wildhack, Analyst

Okay. Thanks.

Operator, Operator

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.

Douglas Busk, Chief Treasury Officer

We would 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. We look forward to talking to you again next quarter. Thank you.

Operator, Operator

Once again, this does conclude today's conference. We thank you for your participation.