Earnings Call Transcript - CACC Q4 2023

Operator, 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, CFO

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, 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.

Ken Booth, CEO

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 assigned 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 – prepayments to below historical average levels. From a growth standpoint, unit and dollar volumes grew 26.7% and 21.3%, respectively, as 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 and adjusted 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 assigned 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

Our first question comes from Moshe Orenbuch of TD Cowen.

Moshe Orenbuch, Analyst

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

Ken Booth, CEO

We feel quite positive about the competitive environment. Volume per dealer serves as a good indicator of the market's intensity. It has increased, although new dealers tend to be less productive compared to established ones. However, our overall growth rate for the quarter and the 30 days after year-end was very high.

Moshe Orenbuch, Analyst

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

Douglas Busk, Chief Treasury Officer

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. Could you talk a little bit about how the financing you did during Q4 is going to impact interest expense? And is there a way to relate that to the amounts of spread that you need to pick up to offset that?

Douglas Busk, Chief Treasury Officer

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, we consider the anticipated expenses we are going to incur 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 a lower return or reduce our metrics relative to the anticipated net cash flows.

Moshe Orenbuch, Analyst

Got it. 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, Chief Treasury Officer

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 loan 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 makes some big assumptions about all else equal.

Moshe Orenbuch, Analyst

Got you. And then just last one for me is, four 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, Chief Treasury Officer

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

Operator, Operator

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, Chief Treasury Officer

The loan performance being worse than initially expected is due to several factors, including the competitive environment during the loans' origination, which negatively affects performance. Additionally, consumers financed vehicles at high valuations, and inflation has also played a role. It's uncertain when loan performance will stabilize. In the past, for instance, the 2015 portfolio leveled off, albeit still declining at a slower pace. Whether this trend will be seen with the 2022 portfolio is yet to be determined, but it is expected to stabilize eventually, although it's hard to predict when that will happen.

Robert Wildhack, Analyst

Could you discuss the current leverage level and your ability to continue buying back shares while also maintaining your current growth rate?

Douglas Busk, Chief Treasury Officer

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 to apples comparison of 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, 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 comfortable with those ranges; can you take them higher? And if there are any other adjustments that you are thinking about when you think about underwriting?

Douglas Busk, Chief Treasury Officer

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 the forecasted collections, I'm wondering if there's any macro assumptions that are baked into there, I guess 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, Chief Treasury Officer

We don't include macro variables like unemployment rates or inflation rates or GDP or anything like that. We do have a 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 the 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 if loan performance is worse than expected, our loans are still likely to produce effective levels of profitability.

Vincent Caintic, Analyst

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

Douglas Busk, Chief Treasury Officer

It's still too early to draw conclusions. So far, the 2023 loans are performing better at this stage compared to the 2022 loans. However, that portfolio isn't very seasoned yet. We have adjusted our strategies in response to the underperformance of the 2021 and 2022 loans. We continuously update our forecasts based on recent trends and loan performance, so we have made changes in that area. Nevertheless, I believe it's premature to make definitive comments on consumer health.

Operator, 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, CFO

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. 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.