Earnings Call Transcript - CACC Q4 2025

Operator, Operator

Good day, everyone, and welcome to the Credit Acceptance Corporation Fourth Quarter 2025 Earnings Call. A webcast recording 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 Financial Officer, Jay Martin.

Jay Martin, CFO

Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation 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 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, 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'd like to introduce our Chief Executive Officer, Vinayak Hegde.

Vinayak Hegde, CEO

Good afternoon, everyone. I'm honored to join you today for my first quarterly earnings call as CEO. While I have only recently stepped into this role, it has been my privilege to serve as Credit Acceptance's Board of Directors for nearly 5 years. That experience gave me a front row seat to the tremendous passion, talent and resilience that define our organization. Prior to joining Credit Acceptance, I led teams at founder-led companies where success came down to 3 things: a clear mission and purpose, an owner's mindset and an obsession with the front line, staying close to customers and those who execute the work every day. Those same attributes drew me to Credit Acceptance. They were instilled by our founder, Don Foss, who led the company from our founding in 1972 until 2017 when he retired as the Chairman of the Board. Let me share a quick reminder of his story and our enduring mission. Don, a car dealer himself, started Credit Acceptance based on a simple but powerful belief. Many hardworking individuals were being unfairly denied the opportunity to finance a vehicle they needed simply because of their past credit challenges or limited credit history. Don believed traditional lenders too often misjudged people with less than prime credit, assuming they weren't worthy of a second chance. He built Credit Acceptance to change that by empowering dealers to serve those individuals through access to financing. These individuals in turn gained reliable transportation and the ability to build or rebuild their credit, a path forward in life. I intend to lead Credit Acceptance in exactly that spirit, embracing the owner's mindset, being driven by the bold mission to help every American buy a car through dealers and obsessing over the front line, understanding dealers' needs intimately and empowering them to serve credit-challenged and credit-invisible consumers. If we serve our dealers and consumers well, I believe our business will thrive. Since assuming the role of CEO nearly 90 days ago, I focused on listening, learning and charting a purposeful path forward. First, I connected with team members throughout the company to better understand the dealer and consumer experience. I also met the dealers to learn firsthand how our services and products support their businesses and consumers and potential points of friction. Next, I developed a growth plan with clear priorities and established highly disciplined operating rhythms. These operating rhythms include weekly business reviews to track performance and address issues in real time and a quarterly game plan with a consolidated road map across all functions of the company to stay tightly aligned with our annual objectives. I believe this type of structured approach creates accountability, agility and consistent progress towards goals. As I move forward, my leadership will be guided by several core operating principles: be obsessed with and remove friction for our customers, both the dealer and the consumer; make data-driven decisions; explore ways to enhance our servicing and processing capabilities through artificial intelligence; prioritize a digital-first approach in our initiatives; and continue to provide a culture that attracts and retains talented people and enables them to excel. Consistent with those core operating principles, I believe we can position Credit Acceptance for growth. We're continuing to prioritize 3 strategic objectives: one, generating dealer and consumer demand by deepening relationships within our dealer network, supporting dealers in acquiring new consumers and leveraging data-driven insights to better understand and serve our markets; two, empowering dealers to fulfill their demand through preferred channels such as our proprietary origination system or through aggregators like RouteOne and Dealertrack; three, delivering world-class servicing and processing. We are continuing to invest in artificial intelligence, which is already supporting our customer service calls and helping to improve efficiency. It also includes making ongoing enhancements to our app, prioritizing customer experience and nurturing long-term loyalty among dealers and consumers. I've been impressed by the strong foundation and dedication across our teams to execute on these priorities. For example, in the fourth quarter, we rolled out a new contract origination experience specifically built for the way franchise and large independent dealers operate in today's market. Increasingly, these dealers originate contracts through aggregator platforms and integrated dealer systems rather than stand-alone lender portals. Our experience meets them where they are. It includes seamless RouteOne e-contracting integration, enhanced deal structuring and optimization tools and expanded support for financial and insurance products, all designed to eliminate friction and make working with Credit Acceptance faster and more intuitive inside the systems dealers already use every day. This launch is particularly timely. The percentage declines in loan unit volume we have seen were most significant among franchise dealers. Notably, we have observed that Consumer Loans originated through franchise dealers also continue to exhibit slightly better credit performance than those from independent dealers. We expect to continue to expand the number of dealers using the new contract origination experience in the first quarter of 2026. I'm encouraged by real dealer stories that show our mission in action, like the one from Town & Country Ford, a family-owned franchise dealership in Alabama. The community in which Town & Country Ford is located faced economic headwinds, including factory closures that left retired steel and iron workers with credit challenges. When the new general sales manager joined, bringing prior positive experience with Credit Acceptance, she recognized an opportunity to empower her team to serve these credit-challenged buyers. She led the dealership to enroll with us, which boosted repeat and referral business while strengthening their local reputation in tough times. This collaboration echoes the very reason Credit Acceptance was founded. Our company was built to provide second chances, help individuals finance reliable transportation, rebuild credit and move their lives forward. At Town & Country, we are seeing that mission come alive. Consumers gain access to vehicles that change their daily lives, while the dealership staff finds renewed purpose in making a difference in their community. When we enable franchise and independent dealers to serve a wider market, everyone wins. Consumers get opportunities, dealers build sustainable businesses and communities benefit from greater economic mobility. Importantly, we delivered our mission while maintaining a great workplace. During the quarter, we were named one of America's Top 100 Most Loved Workplaces for the second consecutive year, with a #6 ranking. I'm deeply impressed by the culture and the excitement to execute our mission and drive Credit Acceptance forward. A special thank you to Ken Booth, who helped build a strong foundation through his leadership and continues to serve our Board. Before I hand it to Jay to provide an overview of our Q4 performance, I want to leave you with one final message. I'm a builder by trade. In my past leadership roles, I have built and scaled innovative customer-centric businesses that transformed how people shop, travel and connect. I believe Credit Acceptance has a very strong foundation, one built on purpose and performance. I'll strive to layer technology, a deeply data-informed approach and a highly structured operating rhythm on top of that foundation to create a dynamic, durable and even more customer-obsessed company. You can expect me to report progress on our initiatives, be transparent about our challenges and be disciplined with capital allocation. We'll maintain our focus on maximizing economic profit and the company's long-term intrinsic value. I'm genuinely excited to partner with all of you, our team, our dealers, our consumers and our investors as we build this next phase together.

Jay Martin, CFO

Thank you. As to the fourth quarter results, we were pleased to announce growth in adjusted earnings per share despite declines in loan performance and loan volume. We financed nearly 72,000 contracts for our dealers and consumers and collected $1.3 billion overall and paid $48 million in dealer holdback and accelerated dealer holdback. Additionally, we enrolled over 1,200 new dealers and had over 9,800 active dealers during the quarter. Loan performance measured by variances in forecasted collection rates from the last quarter moderately declined. More specifically, our 2023 and 2024 vintages declined 0.4% and 0.2%, respectively, while our other vintages were stable during the quarter. Importantly, the underperformance of our '24 vintage was primarily related to loans originated prior to the scorecard change during the third quarter of 2024. We believe the underperformance was largely the result of the continued impact of high inflation on the subprime consumer. Changes to our forecast of future net cash flow sequentially improved this quarter, with the rate of decline narrowing from a decrease of $58.6 million or 0.5% during the third quarter of 2025 to a decrease of $34.2 million or 0.3% during the fourth quarter of '25. Loan volumes also sequentially improved this quarter with year-over-year declines narrowing. Loan unit volume improved to a decline of 9.1% this quarter versus a decline of 16.5% last quarter. Likewise, loan dollar volume improved to a decline of 11.3% this quarter versus a decline of 19.4% last quarter. Our market share in our core segment in used vehicles financed by subprime consumers was 4.5% for the first 2 months of the fourth quarter, down from 5.4% for the same period in 2024. The number of active dealers declined 2.8% year-over-year, and the average unit volume per active dealer declined 6.4% year-over-year. Our loan portfolio, however, increased 1% year-over-year on an adjusted basis. At this time, Vinayak and I will take your questions along with Jay Brinkley, our Senior Vice President and Treasurer; and Jeff Soutar, our Vice President and Assistant Treasurer.

Operator, Operator

Our first question comes from Robert Wildhack with Autonomous Research.

Robert Wildhack, Analyst

Vinayak, welcome. Nice to have you on the call here. A question for you. You spent several years on the Board, so certainly not new to the company, but your background definitely much more from the marketing growth technology areas than it is from maybe more traditional financial services. I thought the opportunities you outlined sound very interesting, but I would love to get your thoughts on how you plan to manage the credit lending, underwriting, more financial aspects of the business. And if you see any opportunities for improvement or change in any of those areas specifically?

Vinayak Hegde, CEO

Robert, thank you for your question. Yes, I mean, look, I mean, we tend to take a long-term view on this, and we want to be conservative in our approach towards lending, do the right thing, and improve the customer experience. But we always take a long-term view on this, not just a short-term view on this. We obviously see opportunities to constantly improve the credit scoring models, improving the models, which we'll constantly continue to do. But the approach towards lending and credit scoring is going to be conservative and long-term focused.

Robert Wildhack, Analyst

Okay. And then maybe one for Jay. The provision, I wanted to ask about specifically the $73 million for new originations. On a per unit basis, that's roughly $1,000 per unit. But for the last 2 quarters, provision per new unit had been more like $700 or $800. So wondering what the driver of the increase is there? And then do you think that, that number should revert more to $800? Or should it run more like $1,000 per unit going forward?

Jay Martin, CFO

The provision for new advances depends on how much we are advancing to the dealer and the mix of our portfolio and purchase program. Typically, the initial provision for the purchase program is about three times greater than that for the portfolio program. Therefore, projecting future provisions will rely on the business mix between purchase and portfolio, as well as the amounts we are advancing to the dealer.

Robert Wildhack, Analyst

Okay. Is the mix the reason for the increase in the fourth quarter specifically?

Jay Martin, CFO

Yes.

Operator, Operator

Our next question comes from Moshe Orenbuch with TD Cowen.

Moshe Orenbuch, Analyst

Could you discuss the competitive environment a bit? It's interesting that the market share you mentioned three months ago was over 5% for the first eight months of the year, and now it has dropped to 4.5%. Is there something significant behind this change? Please elaborate on that.

Vinayak Hegde, CEO

Moshe, thank you for your question. Yes, look, I mean, the competitive environment is always competitive and evolving. We actually want to be more customer-focused and not competitive focused and we'll continue to be customer-focused, not competitive-focused. With respect to the share in the used vehicle subprime market, as of November, it was 4.5%, which is kind of flat quarter-on-quarter since what we reported last quarter. As I said in my remarks, the decline that we are seeing is mostly in the large independent dealers and franchise dealers. And that is where we are focused on actually building solutions for that, right, our new experience where we include seamless RouteOne e-contracting that has launched, enhanced deal structuring and optimization and support for financial tools because that helps these large independent dealers and franchise dealers use us in the workflow that they are already used to, like we kind of are meeting them where they are. And we expect to continue to expand on this to help those large independent dealers, and that's something that we are doing. One thing I want to tell you is like this removing friction in this is like a very interesting thing here, right? Like if you think about it, we have a feature in our system, which allows the dealer and the customer to basically optimize the deal. That's kind of the moment of truth, if you think about it. Imagine you're trying to book an airline or search on Google or buy something on Amazon, it would take 3 minutes. The investments we have done in technology now allows that to be done in less than 2 seconds. And it becomes even more important when you think about this integration with things like RouteOne because we are in competition with others and speed is actually incredibly important. And that's how I think about it.

Moshe Orenbuch, Analyst

Got it. Okay. And maybe talk a little bit about where your leverage is. It looks like it's a little over 2.8 at this point and how you think about that in terms of what you're likely to do from the standpoint of capital distributions going forward.

Unknown Executive, Executive

Moshe, yes, I mean, our leverage continues to be within an acceptable range, albeit at the higher end. But when we think about capital allocation, we haven't changed that strategy. And leverage, obviously, is one of the points that we look at, we always want to ensure that we have the capital needed to fund new originations. After that, we look at a variety of factors, which includes leverage. And then obviously, we look and estimate the intrinsic value of our stock and compare that to the market price to decide if we want to repurchase. And in Q4, obviously, very active, we felt like that was the case. So no overall, no change in strategy there.

Operator, Operator

Our next question comes from John Hecht with Jefferies.

John Hecht, Analyst

Moshe just addressed many of my questions regarding the volumes and competitive landscape, which you have mentioned. Building on that, it has been a tough cycle primarily due to affordability challenges and elevated used car prices. What is your outlook on how these factors will change in the near future? Additionally, do you think that lower interest rates will help ease some of these issues? Are there any other considerations we should keep in mind related to this?

Vinayak Hegde, CEO

Well, we believe we are well positioned to serve the needs of the subprime customer. We work on cycles which are good for us and bad economic cycles, right? So our product is built to serve customers in all sorts of environments. And we will continue to kind of be focused on making the experience much more frictionless, partnering with the dealers and still take a very conservative approach, right? Like I mean, there are companies which take more short-term approach. What we are thinking about is irrespective of the cycle, be conservative, maximize intrinsic value and take a very conservative approach towards it.

John Hecht, Analyst

Okay. Moshe also inquired about the balance sheet leverage. Regarding capital returns and accessing the capital markets, particularly in terms of buybacks, do you anticipate any changes in strategy under your leadership, or will you continue with the current approach?

Vinayak Hegde, CEO

We are going to stay the course. I don't think there's going to be any change in that.

John Hecht, Analyst

And then for the final question, after a period of time during which the initial spread has been declining, I believe we have seen a couple of quarters recently where the spread is starting to expand. Do you think this trend will continue for a while? Is it related to improved pricing or better overall operating metrics within the business?

Jay Martin, CFO

Yes. If you're focused on the initial spread, that relates to pricing. So we don't provide any guidance on what our future pricing will be. You can look at the table in the press release that will show historically how we've been pricing.

Operator, Operator

Our next question comes from Moshe Orenbuch with TD Cowen.

Moshe Orenbuch, Analyst

As a follow-up for Vinayak, it's interesting to note that over the last few quarters, the volumes and market share have faced some pressure, and prepayments in the portfolio have also been affected. I'm curious if this indicates anything different about consumer behavior or industry trends, and whether the market share challenges might be more persistent.

Jay Martin, CFO

You're correct on the prepayments; we did see a decline there with our cash flow timing. If you just look at historical prepayments, they have increased year-over-year, but they're below our historical norms.

Unknown Executive, Executive

It's tough, Moshe. I mean, all you can really read into that, and it's pure conjecture, is perhaps the customers are staying in their vehicles longer because if you follow historical trends, as we've talked about before, typically, you see prepays tick up as sort of a lag to a competitive environment, and we've been in a competitive environment for almost a year, yet we haven't seen that uptick. So it's tough to really see how this will play out. But I'll leave it at that.

Operator, Operator

With no further questions in the queue, I would like to turn the conference back over to Mr. Martin for any additional or closing remarks.

Jay Martin, CFO

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

Operator, Operator

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