Credit Acceptance Corporation (NASDAQ:CACC) Q2 2023 Earnings Call Transcript

Credit Acceptance Corporation (NASDAQ:CACC) Q2 2023 Earnings Call Transcript August 1, 2023

Credit Acceptance Corporation misses on earnings expectations. Reported EPS is $1.69 EPS, expectations were $8.18.

Operator: Good day, everyone, and welcome to the Credit Acceptance Corporation’s Second 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.

Doug Busk: Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation second 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.

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, which decreased forecasted net cash flows by $89 million or 0.9% compared to a decrease in forecasted collection rates during the second quarter of 2022, which decreased forecasted net cash flows by $43 million or 0.5%. The $89 million decrease this quarter included the impact of an adjustment to our forecasting methodology, which decreased our estimate by $45 million or 0.5%.

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In addition, forecasted net cash flow timing slowed, primarily as a result of the decrease in consumer loan repayments to below average levels. Changes in the amount and timing of forecasted net cash flows are recognized in our GAAP results in the period of change through provisions for credit losses and our adjusted results, prospectively over the remaining forecast period of the loans through finance charges. Unit and dollar volumes grew 12.8% and 8.3%, respectively, as compared to the second quarter of 2022. The average balance of our loan portfolio on a GAAP and adjusted basis increased 4.3% and 8.6%, respectively, as compared to the second quarter of 2022. The initial spread on consumer loans assigned increased to 21.2%, compared to 20% on consumer loans assigned in the second quarter of 2022.

Adjusted net income decreased 26% in the second quarter of 2022 to $140 million. Adjusted earnings per share decreased 23% from the first quarter of 2022 to $10.69. At this time, Ken Booth, our Chief Executive Officer; Jay Martin, our Senior Vice President, Finance and Accounting, and I will take your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Arjun Tuteja from Jarislowsky Fraser. Your line is open.

Arjun Tuteja: Hi Ken. You assumed the CEO position approximately two years ago. Could you discuss a couple of things? First being, what has been your strategic focus during the past two years. And second, what are your expectations regarding your areas of focus for the upcoming years?

Ken Booth: Yes. Our long-term strategy here really has been the same as it was even before I took over. We’re trying to build a better business. We’re trying to increase intrinsic value. And we do that really by just growing our dealer base and our loan base and doing that in a way that we get acceptable returns on those loans. So I wouldn’t say much has changed. There’s obviously different strategies that we use to try to do that. I’m not going to really go under the actual strategies that we use. But ultimately, it’s the same thing we’ve been trying to do for a number of years here.

Arjun Tuteja: I agree. I mean I agree here. But I’m just thinking that with Brett leaving and you coming on, have there been some changes maybe culturally or strategically? Or do you think kind of nothing has changed at all?

Ken Booth: We’re investing more in technology. So we’re trying to do some things that make our product more valuable to the dealers, data consumers. But right now, we’re in the investment stage. I’m not even sure we’ve seen any returns on that yet. We’re hoping to in the future. So I would say that’s probably one of the bigger things that we’ve done is invested in the technology.

Arjun Tuteja: Okay. Thank you.

Operator: Our next question comes from the line of John Rowan from Janney Montgomery Scott. Your line is open.

John Rowan: Good evening. Can you guys discuss a little bit more as to what the change in forecasting methodology means? Trying to get a handle on if it’s just the change in the slope of the collection curve or if it’s something else that is away from the historical model?

DougBusk: The change to the absolute amount of forecasted collections was really just due to us incorporating more recent loan performance data in our forecast. We’re always looking at the historical performance of loans with similar attributes and this quarter, we updated our forecast enhancement by including in that more recent loan performance data.

John Rowan: Okay. So there is like no like real wholesale shift though?

DougBusk: No, I don’t think so. I mean it’s a similar methodology, just updated that.

John Rowan: Okay. And then I guess just kind of trying to read between the lines, you talked about some collections being below average. I mean where are the loans marked now? Would you consider kind of the cash that you’re looking to come out of the portfolios kind of reverting to the mean over time? And the covenant marks are below average? I’m just trying to understand if you were being cautious enough previously and how cautious you are going forward? Are you below historical averages now on the portfolio marks going forward?

DougBusk: Well, I think we used the term below average relative to prepayment rate. That’s another thing that happened during the quarter, the timing of our collections slowed and it was really just due to continued decline in prepayment rates, in fact, for the quarter were below the historical average. So the word below average really relates to the timing of the cash flows, not the absolute amount. I will say every quarter, we try to put our best estimate on it. And so I think the forecasted cash flows that we have on the books at June 30 is our best estimate of what’s ultimately going to transpire.