Credit Acceptance Corporation (NASDAQ:CACC) Q1 2023 Earnings Call Transcript

Credit Acceptance Corporation (NASDAQ:CACC) Q1 2023 Earnings Call Transcript May 1, 2023

Credit Acceptance Corporation misses on earnings expectations. Reported EPS is $7.61 EPS, expectations were $8.81.

Operator: Good day, everyone. And welcome to the Credit Acceptance Corporation First 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 website. At this time, I would like to turn the call over to Credit Acceptance Chief Treasury Officer, Doug Busk.

Doug Busk: Thank you. Good afternoon. And welcome to the Credit Acceptance Corporation first quarter 2023 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 laws. 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.

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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 forecasted profitability for consumer loan assignment for consumer loans assigned in 2020 through 2022 that was lower than our estimates at March 31, 2022, due to a decline in forecasted collection rates during the last three quarters of 2022 and slower net cash flow timing during the first quarter of 2023 primarily as a result of a decrease in consumer loan prepayments. Stable forecasted collection rates during the first quarter of 2023 with forecasted net cash flows from our loan portfolio increasing by $9.4 million or 0.1%.

In comparison, our results for the first quarter of 2022 reflected elevated consumer loan performance that followed the distribution of federal stimulus payments and enhanced unemployment benefits. Growth in consumer loan assignment volume as unit and dollar volumes grew 22.8% and 18.6%, respectively, as compared to the first quarter of 2022. The average balance of our loan portfolio on a GAAP and adjusted basis for the first quarter of 2023 increased 0.8% and 5.1%, respectively, as compared to the first quarter of 2022. The average balance of our loan portfolio on a GAAP and adjusted basis for the first quarter of 2023 increased 1% and 1.3%, respectively, as compared to the fourth quarter of 2022. The initial spread on consumer loans assigned in the first quarter of 2023 was 21%, compared to 19.4% on consumer loans assigned in the first quarter of 2022 and 20.9% on consumer loans assigned in the fourth quarter of 2022.

Growth in operating expenses of 14.4% as compared to the first quarter of 2022, primarily due to an increase in the number of team members in our engineering department, as we are investing in our business to enhance our product and transform our technology systems to be more dealer and customer focused. Adjusted net income decreased 35.6% for the first quarter of 2022 to $127 million. Adjusted earnings per share decreased 29.4% from the first quarter of 2022 to $9.71. At this time, Ken Booth, our Chief Executive Officer; Jay Martin, our Senior Vice President of Finance and Accounting; and I will take your questions.

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Q&A Session

Operator: Our first question comes from Moshe Orenbuch with Credit Suisse. Your line is open.

Moshe Orenbuch: Great. Thanks. Doug, I was hoping you could just like kind of talk a little bit about, you talked about stable collections but slower net cash flows. Just talk a little bit about what the two of those things — what that means and how they affect the financials as we go forward?

Doug Busk: Well, the stable net cash flows all else equal should be…

Moshe Orenbuch: I think you said slower net cash flows, right, and stable collections.

Doug Busk: Stable forecasted collection rates, I am sorry.

Moshe Orenbuch: Yeah.

Doug Busk: The stable forecasted collection rates all else equal will cause the yield to be more stable than it would have been if the forecasted collection rates have gone up or down. Obviously, what happens in future periods and the yield on new originations impact that as well, but it’s nice to have stable forecasted collection rates after we had the last three quarters of 2022 where we had modest declines in forecasted collection rates. In terms of the slowing of the timing for the net cash flows, I mean, all else equal that causes a decline in the yield on our portfolio, because obviously, cash flow is coming in over a longer period of time mean less in current dollars than if they came in over a shorter period of time.

Moshe Orenbuch: Got it. And the — and which of those impacts caused the $44 million provision for forecast changes?

Doug Busk: The slowdown in the cash flow timing.

Moshe Orenbuch: Got it. Okay. And when you talk about the initial spread on the loans acquired in the period, like, how do we think about that relative to changes in interest rates or how should we think about it?

Doug Busk: What we are trying to do when we price our loans is, we are trying to maximize the amount of economic profit, which is economic profit per loan times the number of loans originated. Economic profit considers the relationship between what we paid for the loan and what we expected to collect, how those loans perform over time and the anticipated expenses over the life of the loan including interest expense. So if interest expense goes up and we want to earn the same return, we need to lower advance, assuming nothing else change. So it’s a longwinded answer to your question, it’s an expense that needs to be factored into our pricing just like any other expense.

Moshe Orenbuch: Got it. Okay. Thanks. I will get back in the queue.

Operator: Thank you. Our next question comes from Robert Wildhack with Autonomous Research. Your line is open.

Robert Wildhack: Hi. Guys. I wanted to ask a question about unit originations. I think you would said back in January that they were or from mid-February maybe they were up 39% in Jan 2023 and I think they finished up in the high 20s this quarter, which implies a decent slowdown in February and March. So just how much did unit origination growth slow in February and March and then what do you think is behind that slowdown?