Earnings Call Transcript
CREDIT ACCEPTANCE CORP (CACC)
Earnings Call Transcript - CACC Q4 2022
Operator, Operator
Good day, everyone, and welcome to the Credit Acceptance Corporation Fourth 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 Treasurer Officer, Doug Busk.
Doug Busk, Chief Treasurer Officer
Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation fourth 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 GAAP and adjusted results for the quarter include unit and dollar volumes grew 25.6% and 26.2%, respectively, as compared to the fourth quarter of 2021; a decrease in forecasted collection rates for loans originated in 2021 and 2022, which decreased forecasted net cash flows from our loan portfolio by $41 million or 0.5%. Adjusted net income decreased 26.6% from the fourth quarter of 2021 to $156 million. Adjusted earnings per share decreased 17.7% from the fourth quarter of 2021 to $11.74. Stock repurchases of approximately 8,000 shares, which represented 1.6% 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.
Operator, Operator
Thank you. The first question I have is from Moshe Orenbuch of Credit Suisse. Your line is open.
Moshe Orenbuch, Analyst
Great. Thanks. I'm hoping you could give us a little bit of help understanding you've had after several quarters of write-downs of your cash flow expectations, the last three they've been down and mid-40s, 80s and now 41 again. How do we think about where you're sitting in this process? How is that and how should we think about how that affects the yield on the adjusted earnings basis?
Doug Busk, Chief Treasurer Officer
Well, we update our forecasts based on primarily loan performance and how loans with the same attributes have performed historically. So what we've seen I believe for the last three quarters is that loan performance was actually a little bit worse than expected. At the end of the preceding quarter, that's caused our forecast of future net cash flows to decline a little bit. So where we're at, I think, is impossible to say, that what happens to our forecasting collections and therefore the adjusted yield on our portfolio is really dependent on how loan performance is in the future.
Moshe Orenbuch, Analyst
Right. And I don't think you gave any update in the release for January or anything like that, right?
Doug Busk, Chief Treasurer Officer
But we did that. We have volume in there for the first 28 days of the month, but we don't have anything particularly.
Moshe Orenbuch, Analyst
And then Doug, the other element is that the level of originations you just mentioned, I mean, it was up a little bit in January in units, but was kind of flattish to slightly down a little bit in terms of where it was in the fourth quarter. And the spreads don't look like they got any better. Can you kind of characterize it for us sort of the competitive environments? I think there are some people that would have expected by now to see that competitive kind of balance shift away from some other originators. So I guess, where are you seeing and can you kind of talk about that a little bit?
Doug Busk, Chief Treasurer Officer
Well, I mean, I think we had a strong fourth quarter from an origination perspective. And through the first 28 days of January, we had strong originations as well. So I think that the numbers we put up from an origination perspective, really the third and fourth quarter and thus far in January indicates that the competitive environment has improved.
Moshe Orenbuch, Analyst
Got you. And can you explain the spreads you are able to achieve, and how that compares to what you pay for the loans?
Doug Busk, Chief Treasurer Officer
We modified a table in the press release this quarter to show what the spread was based on the initial forecast and what it is as of December 31, 2022. Since 2017, the spread has been approximately 20%. The variability seen has been primarily due to loan performance differing from expectations. In 2019 and 2020, performance was better than expected, positively impacting the spread. However, in 2022, loan performance was likely worse than expected, which will put some pressure on the spread. Our initial spread in Q4 was certainly better than in the first three quarters of the year, but that represents a relatively unseasoned book of business. We will just have to wait and see how loan performance evolves.
Moshe Orenbuch, Analyst
Got it. Thanks. Then last one for me. I mean, the first three quarters of every year you filed a Q along with the earnings release obviously in the fourth quarter, the 10-K takes a little while longer. Given all the activity this quarter, any chance that we'll get an update on kind of the legal and regulatory situation before the K is out?
Doug Busk, Chief Treasurer Officer
And then I can talk a little bit about right now, we generally don't comment on ongoing litigation, but I'll say, we disagree with the allegations in the complaint. We intend to strongly defend ourselves in the pending lawsuit. There was a time consumer with the regulatory expectations were more clear and enforcement was for companies that didn't take compliance seriously. This lawsuit, in my opinion, reflects a different approach. For the company, we always strive to comply with extensive primary laws, regulations, and governance in the industry, and we work hard to do what's right. When you think about our industry and we provide financing options to dealers nationwide that enable dealers to often provide opportunities to millions of consumers who are credit impaired or credit visible. There's approximately 30% of all consumers, which is 67 million adults, that have credit scores below 670, which are credit impaired. There are millions more that are credit visible. Now if the allegations of the lawsuit are credible, there would be a significant impact on the finance industry and all these consumers across the country. So we'll be addressing them with the court during the course of litigation. But again, we disagree with the allegations and we intend to vigorously defend ourselves.
Moshe Orenbuch, Analyst
Okay. Thanks very much.
Operator, Operator
Thank you. One moment while we prepare for the next question. And our next question will be coming from John Rowan of Janney. Your line is open.
John Rowan, Analyst
Good afternoon, guys.
Doug Busk, Chief Treasurer Officer
Hey, John.
John Rowan, Analyst
Since you're willing to discuss the lawsuit a bit, I wanted to clarify and get your perspective. You can read the complaint and see what the maintenance issues are. When you settled with Massachusetts, I want to confirm that there was nothing in that settlement related to user laws. The settlement isn't completely clear, but it seemed to involve two technical issues: one was a requirement specific to Massachusetts, and the other was about posting some resale value on our repossession. As I understand it, nothing settled in Massachusetts pertained to the main user charge, correct?
Doug Busk, Chief Treasurer Officer
Yeah. The settlement agreement revolved around the two issues that you mentioned principally.
John Rowan, Analyst
Okay. So just moving past that. Obviously, there was a little bit of a jump up in G&A expense. Was there anything to do with legal expenses?
Doug Busk, Chief Treasurer Officer
G&A expense increased due to increased expenses in the technology area and in legal.
John Rowan, Analyst
Okay. The provision expense, is it safe to assume that excluding forecast changes that it's in the $90 million run rate based on the growth that you're putting on?
Doug Busk, Chief Treasurer Officer
It was lower than in the fourth quarter. The new loan provision was $60 million, but remember that unit volumes in the fourth quarter are usually at a seasonal low.
John Rowan, Analyst
Okay. To revisit the competitive environment, the funding markets for most subprime ABS were quite disorganized in the fourth quarter, with significantly wide spreads. However, we have seen some improvement in January with many subprime ABS deals being issued and spreads noticeably lower than they were at the end of last year. Can you provide insights on how this might reflect the competitive landscape? Additionally, how should we interpret this in relation to a cycle that could restore some spread to your operations, especially if it indicates increased competition with a less risk-averse funding market? Thank you.
Doug Busk, Chief Treasurer Officer
Yeah. I mean, potentially, that causes the market to be a little bit more competitive. I mean, you're right, the market tone this year has been more constructive. You still have a situation where base rates are elevated and credit spreads, though not as high as they were in Q4 are certainly higher than they were for a number of years. So, we'll have to see what happens, but it's conceivable that the competitive environment could become a little bit more intense if the funding markets continue to be constructive. We'll just have to see how it plays out.
John Rowan, Analyst
All right. Thank you.
Operator, Operator
Thank you. One moment while we prepare for the next question. Next question will be coming from Rob Wildhack of Autonomous Research. Your line is open.
Rob Wildhack, Analyst
Hi, guys. Just one more on the funding market. Given your origination growth and the better spreads now, why not tap the ABS market yourselves?
Doug Busk, Chief Treasurer Officer
Well, we certainly intend to. But at the end of the year, we had about $1.6 billion in unused availability at our committed revolving credit facilities. So a very strong liquidity position. But I mean that's something we'll do at the appropriate time.
Rob Wildhack, Analyst
Okay. So safe to assume and to tie it back to New York State, there's nothing in that lawsuit that would preclude you from continuing to tap the ABS market, right?
Doug Busk, Chief Treasurer Officer
Correct. The complaint is a complaint, but there's nothing in there that would prohibit us from accessing the securitization market.
Rob Wildhack, Analyst
Got it. And then to switch over. In the press release, you called out forecasted profitability on a few different vintages. Can you define that for us? And then I'm kind of wondering why forecasted profitability for the '22 vintage would be significantly lower, but the forecasted collections are only like 1 percentage point lower than initial.
Doug Busk, Chief Treasurer Officer
Forecasted profitability, as we define it, refers to forecasted economic profit, which is the non-GAAP financial measure mentioned in the press release. Compared to 2022, the standard we set is quite low—essentially one-tenth of a percent in the collection rate. While one could argue whether that is significant, it is the benchmark we have selected to apply. I'm referring to 1%.
Rob Wildhack, Analyst
Okay. So 1% on collections is significantly lower in '22. Okay. Got it. And then one more. On past calls, you've said that when you're growing originations, you probably buy back less stock. This quarter, you were able to kind of do both. What's going on there? And how should we think about share repurchases if you do continue to grow in '23?
Doug Busk, Chief Treasurer Officer
As we’ve said before, the first priority is always to make sure we have the capital that we need to fund anticipated levels of originations. So that’s going to be the first priority. In terms of share repurchases, I think it just depends on how the capital markets function, what our growth rates are and things like that. But the first priority will always be the funds to levels of loan originations.
Rob Wildhack, Analyst
Okay. Thank you.
Operator, Operator
Thank you. One moment while we prepare for the next question. Our next question is coming from John Hecht of Jefferies. Your line is open.
John Hecht, Analyst
Good afternoon, everyone. Thank you for taking my questions. You mentioned earlier some questions about the previous three quarters, regarding write-downs in cash flows. I'm curious about your thoughts on what might be causing that. Is it related to structural factors in the loans recently, inflation, or is it due to declining asset values? Do you have any insights into the reasons behind this trend over the last few quarters?
Doug Busk, Chief Treasurer Officer
It's tough to say precisely, but I think it's likely primarily the impact of inflation on a subprime consumer and then declining vehicle values for the last six, seven, eight months.
John Hecht, Analyst
And then, I mean, I don't know if you're willing to do this. But I mean, obviously, you guys are probably in communications with your dealer partners all the time on your comments about inventory levels and purchase volumes. Is it your perspective that kind of the worst is behind the dealers, meaning that this system is starting to stabilize or do you guys think there's more to come in terms of reduction of demand and reduction in part prices? How do you think about the forward perspective?
Doug Busk, Chief Treasurer Officer
Used car prices are declining, which has helped address affordability issues. The inventory situation is better than it was, but it's not where it was pre-pandemic and used car prices are still elevated. Where it goes from here, I think is anyone's guess. We don't have the ability to predict the future. So we'll just have to see.
John Hecht, Analyst
So with that in mind, I mean, maybe it seems like a more confusing picture. Would you consider yourself more selective or are there ways for you to tighten given that uncertainty or is it just sort of just keep eyes wide open and is a day-to-day thing?
Doug Busk, Chief Treasurer Officer
I mean we always build a very significant margin of safety into the way we price our loans. We recognize that if you're writing a 60-month volume, there's a host of things you can't predict that will occur over the next 60 months. What will inflation do, what will unemployment do, what will used car prices do? So the way that we address all those uncertainties is by building a significant margin of safety into the way we price. We're writing business that generally produces very high returns, and we price our business so that if loan performance is worse than expected, our loans are still highly likely to be profitable.
John Hecht, Analyst
Okay. I appreciate the color. Thank you guys very much.
Operator, Operator
Thank you. One moment while we prepare for the next question. Next question will be coming from Ray Cheesman of Anfield Capital. Your line is open.
Ray Cheesman, Analyst
Thank you. Doug, just following up on John's question. As you look forward now, I'm guessing you have a model of what you expect the world to do. I'm wondering, if you would be willing to share any of your modeling assumptions like where do you think unemployment will be at the end of the year or where do you think the 10-year will be at the end of the year, the things that would drive that CECL model?
Doug Busk, Chief Treasurer Officer
I mean, like I just said in the last question, there's a whole bunch of things that are unforecastable. So we don't attempt to forecast the things that are unforecastable. We just address those uncertainties by pricing our loans with a big margin of safety. So when we put together our forecast of future cash flows, they're based on actual loan performance and the historical performance of loans with similar attributes, and those forecasts historically have been pretty accurate.
Ray Cheesman, Analyst
As we move into 2023 and observe various opinions regarding lower tax rebates and dwindling savings, are you prepared with pricing and risk adjustments to safeguard your position? Are you adapting your terms as needed while keeping your margins intact and ensuring profitability? It appears that in recent quarters, the economic situation has become challenging. I want to confirm that you continue to prioritize profitability, as you have historically been a highly profitable company, and it's important to me that CACC maintains that status.
Doug Busk, Chief Treasurer Officer
When making pricing decisions for our loans, we certainly take into account our loan performance.
Ray Cheesman, Analyst
And then just one more, the fact that the used car market is dropping, I guess I saw recently, Ally expects 13% and other people expect between 10% and 20%. That's not great news for prior vintages, but it actually should be good for growth of future vintages, right?
Doug Busk, Chief Treasurer Officer
I would agree with that.
Operator, Operator
Thank you very much. You’ve given me some confidence, Doug. Thank you. Thank you. One moment while we prepare for the next question. Our next question is coming from the representative of Bank of America. Your line is open.
Unidentified Participant, Analyst
Doug, this is Shane from Bank of America. Thank you for taking my question. I see that your bonds are trading in the low-90s. You mentioned capital allocation emphasizing investing and ensuring you have enough to support your growth in volumes this year. Given the current bond pricing, do you plan to consider addressing some of the maturities before they are due in 2024?
Doug Busk, Chief Treasurer Officer
Conceivably, we've explored retiring some of the bonds early. Obviously, have elected to do anything thus far, but we've taken a look at that. And we'll just have to weigh the attractiveness of that alternative with the need to invest in new loans.
Unidentified Participant, Analyst
Thanks. Previously, you filed the 8-K regarding the New York lawsuit. Have you received any updates or indications from other states that they might be proceeding with lawsuits, or has there been nothing new on that front?
Doug Busk, Chief Treasurer Officer
We're not going to say anything about the existing lawsuit other than what Ken mentioned earlier in the call.
Operator, Operator
Thank you. One moment while we prepare for the next question. Our next question is coming from Christopher Ryan of Radcliffe. Your line is open.
Christopher Ryan, Analyst
Hi. Thanks for taking my question. Just is there any timeline known right now about the New York CFPB lawsuit they can give us?
Doug Busk, Chief Treasurer Officer
I can't answer that one, no.
Christopher Ryan, Analyst
Okay. And then what was the average price paid for share repurchase in the quarter?
Doug Busk, Chief Treasurer Officer
Was 208,000 shares at an average price of, I believe, 455, so that's around $100 million.
Christopher Ryan, Analyst
Got it. Thank you. That’s all my questions.
Operator, Operator
Thank you. That concludes today's Q&A session. I would like to turn the call back over to Mr. Busk for any further additional comments or closing remarks.
Doug Busk, Chief Treasurer Officer
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.
Operator, Operator
Once again, this concludes today's conference. We thank you for your participation. Everyone may disconnect.