Credit Acceptance Corporation (NASDAQ:CACC) Q4 2022 Earnings Call Transcript

Credit Acceptance Corporation (NASDAQ:CACC) Q4 2022 Earnings Call Transcript January 31, 2023

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: 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.

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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: Thank you. The first call, questions I have is coming from Moshe Orenbuch of Credit Suisse. Your line is open.

Moshe Orenbuch: Great. Thanks. I’m hoping you could give us a little bit of, kind of a help understanding you’ve had after several quarters of kind of write-ups 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 like where you’re sitting in this process? Like how is that and how should we think about how that affects the yield on the adjusted earnings basis?

Doug Busk: 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 how long performance is in the future.

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Q&A Session

Moshe Orenbuch: Right. And I don’t think you gave any update in the release for January or anything like that, right?

Doug Busk: 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: 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 and 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: 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 origination perspective, really the third and fourth quarter and thus far in January indicates that the competitive environment has improved.

Moshe Orenbuch: Got you. And the spreads that you’re able to achieve and that was the difference between what your — for collections in your — what you pay for the loans?

Doug Busk: The spread — we modified a table in the press release this year to show you or this quarter to show you what spread was based on the initial forecast and what the spread is as of December 31, 2022. And really since 2017, the spread has been approximately — the initial spread has been approximately 20%. The variability you’ve seen there has been primarily due to loan performance being different than expected. In €˜19 and €˜20, it was — well performance is better than expected that had a positive impact on the spread. And then in 2022, with loan performance, that’s probably the worse than expected that will put a bit of pressure on the spread. Our initial spread in Q4 was certainly better than it was in the first three quarters of the year. But that’s a relatively unseasoned book of business. We’ll just have to see what happens to loan performance.

Moshe Orenbuch: 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: And then I can talk a little bit about right now, we generally don’t comment on access litigation, but I’ll say, we disagree with the allegations on the complaint. We intend to strongly defend ourselves and the pending lawsuit. There was a time consumer (ph) 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 to laws, regulations, the governor 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 often opportunities and millions of consumers who are kind of impaired or kind of miserable.