Credit Acceptance Corporation

Good day, everyone, and welcome to the Credit Acceptance Corporation Fourth Quarter 2021 Earnings Conference 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 Buss.

Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation Fourth Quarter 2021 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 results for the quarter include unit and dollar volumes declined 22.6% and 12.7% respectively compared to the fourth quarter of 2020. An increase in forecasted collection rates for loans originated in 2019 and 2020. This resulted in a $31.9 million increase in the forecasted net cash flows from our loan portfolio. Adjusted net income increased 12% from the fourth quarter of 2020 to $212.6 million. Adjusted earnings per share increased 33% from the fourth quarter of 2020 to $14.26. And stock repurchases of approximately 606,000 shares, 4.1% 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.

Ladies and gentlemen, if you'd like to ask a question at this time, you will need to press the start and the one key on your touch-tone telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And our first question coming from the line of Moshe Orange with Credit Suisse, your line is open.

Great, thanks. A couple of things, I guess. First off, in the release, you talk about the January volumes as being down 36.6%. I'm sorry, down 36.8%. But you also mentioned that January 2021 was particularly strong. Like, how should we think about That commentary, was that just in January? Was that the rest of the quarter? Can you talk about that a little bit?

January was, in a relative sense, was a pretty strong month last year. I think we were down 6% for the month of January versus the January of the prior year. The quarter was... Not that strong, but still better than the quarters we've experienced recently. And, again, I believe that the strength in January of last year was due to stimulus. Got it. Okay.

And, you know, you mentioned the $31.9 million kind of write-ups on the 2019 and 2020 figures. As I look here, it says that there's a 0.3% reduction in your expected cash flows for the loans originated most recently.

Yeah, typically, if you look at the most recent quarter disclosed, there will be a decline from our initial estimate. As you point out, the fourth quarter of this year, the decline was three-tenths of a percent A lot of that is just due to the fact that we don't remove canceled consumer loans from the denominator in calculating the ratio. That's disclosed in footnote one to the table on page two. Generally, what you see, I mean, the loan cancels occur early in the life of the loan, and then after that, what has historically happened is you know, the loans outperform and, you know, that becomes a positive number. That's what's happened historically. Whether that will be the case in Q4, we'll have to see.

Got it. Thanks. And then you mentioned the 600,000 and change shares that you repurchased. Can you talk a little bit about, you know, kind of how you're looking at your leverage and what that might mean for your ability to buy back shares in the future?

You know, we're continuing to think about stock buybacks the same way we have in the past. You know, want to make sure we have ample liquidity. And if we have ample liquidity and believe that purchasing shares is a good use of shareholders' money, you know, we'll continue to invest in stock repurchases. You know, relative to financial leverage, Historically, we've repurchased more stock when we're lowly leveraged than we're highly leveraged. So I would expect that stock repurchases perhaps may not be as strong in the next couple quarters as they were in the last half of this past year.

Thanks very much.

Our next question coming from Delana of David Sharp with JMP Securities. Your line is open.

Hello. Good afternoon, and thanks for taking my questions. This may be kind of difficult to pinpoint, but as we just think about the volume pressures on the entire industry, as well as yours specifically, driven by just these excessive used car prices, sort of wondering, you know, is there any sort of metric or percentage decline in benchmarks like the Mannheim or NADA index? Is there any sort of figure that we could potentially look to that would signal a sort of turnaround in in consumer demand in your mind. You know, for example, I'm looking six quarters back, your average contract size was 11% lower than it is now. And I'm just wondering if there's sort of, if not a silver bullet, you know, is there a decline in the Mannheim or decline in average used car prices from today's level that you would feel comfortable would probably be signaling a turnaround in to positive year-over-year growth in unit volume for both you and the industry?

I don't think you can say that there's a magic number out there with the Mannheim or any other used car index. I think if used car prices remain stable or increase, I think that's a bad thing from a volume perspective. And if used car prices decline, I think that's a a positive, and the more they decline, you know, the better. But I don't think there's no magic number. There's no cliff when magically things, you know, go back to normal. I think it's just gradual.

Right, right. Yeah, no, clearly directionally. We're kind of waiting for that turnaround. I guess, you know, sort of just to venture into your crystal ball, I mean, do you have any commentary on you're able to provide on your outlook for used car volumes, independent dealer health, and, you know, deep subprime demand throughout 2022?

I don't think that we have any unique insight there. I think, you know, your guess is as good as ours, David. Got it. Got it. Okay.

Well, thank you very much.

Our next question coming from the line of Rob with Autonomous Research.

Hi, guys. Hello. Hello. Can you just highlight or update us on what you're seeing competitively in the market?

Obviously, you can see our volumes are down. If you think about our marketplace, I think a good way to look at it is looking at our volume per dealer. You know, there's industry data that shows subprimes down. I guess really that would be my overall thought is, you know, buying for dealer kind of shows the strength of the competitive market.

Well, I think historically any time the industry has had, you know, access to lots of capital and the cost of that capital is cheap, it –

And pardon me, this is the operator. I'm showing the speaker line as disconnected. We'll give it a moment until they reconnect. Please stand by.

we confirm if they heard the last response.

Are we live?

Yes, speakers, you're now back live.

This is Doug Busk. We were disconnected there. I'm not sure if my last response was completely heard or not, but I apologize for that.

Hey, Doug, this is Rob. Can you hear me? I'm not sure if I'm live either. Yep, I can hear you. Okay, great. You cut off right around, you were going into the, you know, when competitors have lots of access to capital and the cost of capital is cheap, and that's when it dropped off.

Okay.

Thanks for refreshing me. Yeah, so generally when those conditions exist, the marketplace tends to be pretty competitive and You know, the current environment is no exception. There's, you know, lots of companies out there with access to lots of capital at very low cost.

Got it. And then maybe to stick with that comment, I mean, do you think that a rise in interest rates here through 2022 would be enough to dent competition, or do you need, you know, prevailing interest rates to be considerably higher than they are right now?

I think it's kind of like the used car price question. Every little bit helps. But I think it would have to be substantially higher to have a meaningful impact.

Got it. And if I could ask one more on the consumer side. I'm just wondering if you could comment a bit on the potential impact that inflation could have on consumers' ability to repay. With inflation running as high as it was, does that factor into your expected collections in any way?

No, it doesn't. We base our forecasted collections on how loans with similar attributes have performed historically. So we don't have a macroeconomic component that we overlay on that. So, you know, if we have a period of, you know, significantly higher than normal inflation, you know, that has the potential to impact customers' ability to pay.

Okay. Thank you.

Our next question coming from the line of John Hedge with Jeffries. Your line is open.

Yeah, thanks very much. You're just thinking about volume. I mean, you touched on pricing and competition, but how much of your volume is impacted by just low overall inventory levels and other industry factors?

I think that's a significant thing that's impacting us right now. It's I think, honestly, the last couple of questioners have asked about when there might be a turnaround. I think the most likely time there will be a turnaround for volume for us will be when vehicles are more readily available and prices kind of stabilize and maybe go back to normal where they become a depreciating asset.

Do you have any thoughts based on what you're hearing from industry sources when whether it's off-lease supply or some fleet sales or repossessions, any sense for when that might start to occur?

You know, obviously we spent a lot of time kind of scouring information sources to learn about that. But, you know, I'll be honest, I think there's a wide range of possibilities there. You know, I've seen reasonable sources predict to be later this year, and I've seen reasonable sources say it won't be until early 2024. You know, I think there's a lot of uncertainty, you know, related to the downstream impact of the pandemic. And, you know, until cars are available, we're not really sure when that will be. But, you know, we still view it in the grand scheme of things as a temporary situation, not a permanent one.

Okay. And then, you know, your yields benefited this quarter from strong performance. Yes. And, you know, obviously you may have strong performance all the time and you may not. But, like, if we're excluding the – call it the incrementally strong performance of some of the recent vintages, what do you guys think the yield on your – what's the right yield on your portfolio as things normalize? Are you talking about the gap yield or the adjusted yield? Yeah, correct. Yeah, just the gap yield, which is – Effectively, finance charges divided by the average loan balance.

Yeah. I mean, the gap yield is based off of contractual cash flows, which we know we're never going to make that yield, so we don't spend a lot of time focusing on it. But I think the gap yield we're reflecting today pretty much reflects the It's pretty close to the contractually yield on the loans that we're writing today. But again, because of CECL and the fact that our gap yield is based on contractual cash flows, we don't spend a lot of time focusing on that.

Okay. And then that covers my questions. Appreciate it. Thanks very much. Yep.

Our next question coming from the line of John Rowan with Janie Montgomery. Good afternoon.

Doug, you talk a lot about car prices impacting volume. I'm wondering what, if any, impact there was in the duration reduction in the fourth quarter. From a volume perspective and whether or not you were at 58 months again in January or if there was another duration cut in January affecting that year over year performance?

I don't know what the duration is going to be in January. The reduction from 59 to 58, again, just a function of car prices and affordability issues for consumers. I would I expect that that probably continued in January, but I don't know for sure.

Okay, and then just lastly for me, I think there was a relatively big increase in other income. Was there anything one time in nature in there, or what was driving that $18.3 million other income line?

Yeah, it's primarily related to our ancillary product profit sharing. A lot of that is driven by claims rates. We did see lower claims rates in the fourth quarter. Can't really see it. It's been volatile historically, so it's not necessarily a permanent change. I think it's just normal volatility within the profit sharing. Okay. All right. Thank you.

And as a reminder, ladies and gentlemen, to ask a question, please press star 1. And our next question coming from the line of Vince Vincent Kated with Stevens. Your line is open.

Thank you. Just two quick ones. So one is a follow-up. That other income line with the increase in SLA profit sharing, is that something that, because credit's better, we should expect to continue, or is that sort of a one-time true-up for this quarter?

I would say it's not related to credit. It's not necessarily a one-time true-up. It's just how claims rates have come in. It's primarily related to our gap product. So I would say I do think we were helped out with some higher vehicle prices there. Probably had some impact on claims rates. But historically, it's we've seen a fair amount of fluctuation in our claims rates over time. So, again, I would just consider it to be normal volatility.

Okay. Gotcha. Thank you. And then the second one is on expenses. So just wondering how to think about that going forward. So the salaries and wages, that was up 46% year over year, but your G&A expense was down 11%. Just how to kind of think about how you're managing expenses going forward. Thank you.

Well, a lot of the increase in the expenses, as we point out in the release, just relate to stock compensation expense relating to stock options that were granted to the executive team as part of a new pay plan. That's really what's driving the vast majority of the increase in expense in the last couple quarters.

Okay, got it. So that would be for both the, so I guess that would be salary and wages, but the G&A, on the other hand, went down, so that was nice that the G&A expense went down. Just wondering what we should be expecting going forward in terms of efficiency.

I mean, you know, big picture, you know, our expenses as a percent of revenue or expenses as a percent of average capital have declined over long-term as we've grown the business because we've benefited from operating leverage. As we're in this period where we're not growing and average capital will perhaps be declining, I think it's logical to assume that our operating leverage would be under pressure and could go the other way. The degree to which it does so will just depend on you know, what happens from a growth perspective. Okay, that makes sense.

Thank you, that's all I had.

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

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 at ir at creditacceptance.com. We look forward to talking to you again next quarter. Thank you.

Ladies and gentlemen, that does end our conference for today. Thank you for your participation. You may now disconnect.