This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: Good day, everyone, and welcome to the Credit Acceptance Corporation second quarter 2024 earnings call. Today's call is being recorded. A webcast and transcript of today's earning call will be made available on Credit Acceptance website. At this time, I'd like to turn the call over to Credit Acceptance Chief Financial Officer Jay Martin.
spk06: Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation second quarter 2024 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 the GAAP measures. At this time, Ken Booth to discuss our second quarter results.
spk04: Thanks, Jay. We had a mixed quarter as it related to collections and originations, two key drivers of our business. Our 2022 vintage continued to underperform our expectations, and our 2023 vintage began to slip as well. We made an additional $147 million adjustment to forecasted net cash flows on top of our normal loan forecast model, but just our loans originated in 2022, 2023, and the first half of 2024, what we believe the ultimate collection rate will be based upon trending data over the last several years. Historically, our model has been very good at predicting loan performance in aggregate, but our models worked out during less volatile times. The pandemic and its ripple effects created volatile conditions, federal stimulus, enhanced unemployment benefits, and supply chain disruptions, led to vehicle shortages, inflation, et cetera, all of which impacted competitive conditions. We have had larger-than-average forecast misses, both high and low, during this volatile period. But because we understand forecasting collection rates is challenging, our business model is designed to produce acceptable returns, even if loan performance is less than forecasted. Even with our reduction in forecasted collections this quarter, we believe we will continue to produce substantial economic profit per share in the future. As I've explained in the past, we are less reactive to changes in competitive and economic cycles than others in the industry because we take a long view on the industry, we price to maximize economic profit over the long term, and we seek the best position in the company if access to capital becomes limited. Ultimately, we are happy we have the discipline to maintain underwriting standards during the easy money times of 2021 and especially 2022. As well, our market share was lower during those years, We believe it has put us in a better position to take advantage of more favorable market conditions today. During the quarter, we experienced strong growth and had our highest Q2 unit and dollar volume ever, growing our loan unit and dollar volume by 20.9% and 16.3% respectively. Our loan portfolio is now at new record highs at $8.6 billion on an adjusted basis. Our market share in our core segment continues to increase, being 6.6% as of May 31st, 2024. Beyond these two key drivers, we continue making progress during the quarter towards our mission of creating intrinsic value and positively changing the lives of our Phi Key constituents, dealers, consumers, team members, investors, and the communities we operate in. We do this by providing a valuable product that enables dealers to sell to consumers regardless of their credit history, Dealers make incremental sales for the roughly 55% of adults with other than prime credit So these adults that enables them to obtain a truck vehicle to get to their jobs take the kids to school, etc It also gives them the opportunity to improve or build their credit During the quarter we originated one hundred thousand and fifty seven contracts for our viewers and consumers We collected 1.3 billion overall and paid 84 million in portfolio profit from portfolio profit Express to our dealers We added 1,080 new dealers to the quarter and now have our largest number of active dealers ever for a second quarter with 10,736 active dealers. From an initiative perspective, we continue trying new go-to-market approaches using a test and learn approach. We believe some of these have been successful and have contributed to our growth. We also continued investing in our technology team. We have ramped up personnel and are focusing on modernizing how our team performed work with the goal of increasing the speed in which we enhance our product for our viewers and consumers. Around the corner, we received three awards from Fortune, U.S. News, and the Best Practices Institute. We recognize this is a great place to work. We continue to focus on making our amazing workplace even better. We support our team members in making a difference that would make the difference to them in connection with their efforts. We contributed to organizations such as Make-A-Wish Foundation, St. Jude Children's Research Hospital, the Shades of Pink Foundation, and VERSITY, Blood Center of Michigan, among others. Now, Doug Busk, our Chief Charity Officer, Jay, and I will take your questions.
spk07: Thank you. At this moment, we'll conduct the question and answer session. To ask a question, you'll need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Moshe Arembunch of TD Calwin. Your line is now open.
spk01: Great, thanks. Is there any way to kind of explain what changes you made in the forecasting methodology? Did you have misses more on the likelihood of default, recoveries on the auto afterwards, or any other practice changes that are involved?
spk05: Well, the first thing is we now believe that the 2022 originations are seasoned enough for us to enhance our estimate over what we provided previously. What we've done, simplistically, is we have assumed that the 23 and 24 originations are going to exhibit similar trends in terms of variance from the initial forecast and the slope of the collection curve which we blotted out over time, we're assuming that those percentage changes is going to be similar to what we've seen in 2022. Those trends that we're seeing in 23 and 24 are there, but they're less severe than the 22 loans. And since those books of business are also performing better from an absolute perspective, the adjustment in percentage terms is less significant than the mess we're going to have on the 22 business. So it was really just assuming that the 23 and 24 originations will behave similarly on a percentage basis to what we've seen on 22.
spk01: Doug, one of the things that's unique about the way you guys kind of report your adjusted earnings is you take you take that hit into your provision this quarter, but you spread out the impact on future periods. You had a 19.6% yield, adjusted revenue yield. Can you give us some way of thinking about how much of this is going to flow through and over what period and how to think about the impact on that 19.6%?
spk05: Well, I think just the yield on the loan asset was 17.7% in the quarter I think revenue is a percent of average capital at 19.6. So two slightly different things, but they'll behave similarly. You know, all else equal, if loan performance is exactly as expected, we would expect the yield or revenue, if you want to look at it as a percent of average capital, to decline in Q3. The magnitude of the decline will obviously be dependent on the yield on new originations and obviously whether loan performance is better or worse than expected. But all else equal, we would expect revenue or the yield on the portfolio to decline.
spk01: The last one for me, and honestly, I'm struggling as to how to phrase this, but given that this is the second of these in basically a year, I guess why is it a good thing that you're originating more loans? In other words, shouldn't you be doing the opposite? Shouldn't you be pulling back and saying, maybe we're doing something wrong here?
spk05: It's a fair question. As Ken said in his intro, We still believe that these loans are producing returns in excess of our weighted average cost of capital. That's generally a high return than you're going to see from others in the industry. So we think it's adding shareholder value to continue to originate the business that we're originating. And as I said, we feel better about the 23 and 24 loans than we did about the 22 loans. which were obviously very disappointing to us. Thank you very much.
spk07: Thank you. One moment for our next question. Our next question comes from the line of John Rowan of Janie Montgomery Scott. Your line is now open.
spk00: Good afternoon, guys. I guess I'm going to ask Moshe's question, but a little differently. The implied spreads are still pretty high. The initial implied spreads for 2024 are still high, historically speaking. What gives you confidence that those are the right numbers given the magnitude of the reductions that you're putting into prior forecast revisions? I guess just trying to figure out if there's more risk of continuing to write portfolio down if we're aggressive on you know, some of the assumptions going in that are, again, still riding to relatively high spreads, historically speaking?
spk05: I mean, we're, you know, as I said, you know, we're basing our current estimate for 23 and 24, you know, based on the absolute performance to date of those vintages, and then we're applying a similar degradation in the collection rate, over time to what we've seen on 22. Now, you know, we're using history as our guide there and, you know, forecasting consumer loans, especially in recent years, has been challenging. So we're putting our best number on it, but is there a, you know, chance we could be wrong? There's always a chance.
spk00: Okay. And then just for kind of modeling purposes, obviously with the gap loss in the quarter, I assume the share count that you reported was the basic share count. Can you just give me an idea of what the real diluted share count would be or how many diluted shares you'd have so going forward we get that in the model?
spk06: Yeah, I think if you look in our 10Q, earnings per share footnote, it'll show you how many shares were anti-diluted for the quarter. That is the case. Since it was a loss, we needed to stick with the basic shares. Just taking a quick look here to see what was excluded as anti-dilutive. Looks like it was around for the quarter, 217,000 shares. Okay. That's what I needed to know. Thank you.
spk07: Thank you. One moment for our next questions. Our next question comes from the line of Rob Wildhack of RR News Research. Your line is now open.
spk02: Hi, guys. One more on the 23 vintage. You know, some other lenders have talked about the early part of that year, maybe the first quarter of 2023. Loans originated then as driving underperformance for that vintage. Would you echo that, or is the underperformance that you're seeing in 2023 pretty broad-based across originations throughout the year?
spk05: No, I would say that that's a fair comment. You know, we have seen a situation where the early 21 loans performed better than the last half of 21. The first part of 22 was kind of the bottom from a performance perspective. Things got somewhat better at the end of 22 and, you know, got better in the first part of 23, but the underperformance on You know, the performance of the second half of 23 loans was better than the first half for sure. And that trend has continued into 2024. So long-winded answer, I would agree with your commentary.
spk02: Okay, thanks. And then just on the unit growth, I think April was slower than the quarter was in aggregate, which would imply a step up in growth in May and June. Is there anything specific that was driving the acceleration of May and June? And then to ask the question kind of forward-looking, you know, July looks pretty strong at plus 28%. Anything to call out there? Is July benefiting from an easy compare or anything like that? Or do you think you can continue to grow at that pace going forward?
spk04: I think it's always difficult to predict. You know, there's a lot of macro uncertainties around the competitive environment, inflation, interest rates, things like that. To me, you are right that it's improved throughout the quarter and into July. Whether that continues or not, it's really tough to say. We will have proper comparables going forward. That being said, we have made improvements to our product, and we're hoping that's having a difference as well. We believe that is a positive impact. If you look at buying for dealer itself, that's a good sign for us, and that means our product's probably better, and it means our competitive market's better, and hopefully that continues.
spk05: I think the other point I would add to what Ken said is it's hard to draw any conclusions from just looking at one month at a time. I mean, if I look at the growth rates for the quarter, April was 17%, May was 26%, June was 20%, and then July is back up running at 27%. So, you know, when you break it down into smaller units, you obviously get more variability.
spk02: Yep. Okay. Thank you.
spk07: Thank you. One moment for our next question. Again, as a reminder, to ask a question, you'll need to press star 11 on your telephone. Our next question comes from the line of Ryan Shelley of Bank of America. Your line is now open.
spk03: Hey, guys, quick question here. So along with your earnings, you filed amendments to both the revolving credit agreement and one of the warehouse agreements around the definition of consolidated net income. Can you just explain the rationale there and, yeah, like what that definition changes all about? Thanks.
spk05: Yeah, I mean, as we've said for years in our press releases, we think the best way to evaluate our financial performance is is on the basis of level yield accounting based on forecasted cash flows. So, you know, we're looking at the forecasted amount and timing of the cash flows and discounting that back, and that gives you a yield. And, you know, we're using that yield for revenue recognition. And then if, you know, every month you re-forecast the loans, and if your forecast goes up or down, you adjust your forecast prospectively. The adjustments that we made to the definitions in those credit facilities basically start with GAAP net income, back out the provision for credit losses, and then apply the floating yield adjustment. And when you do that, you get to level yield revenue recognition based on forecasted cash flows.
spk03: Got it.
spk08: Thanks. Thanks for the time.
spk07: With no further questions in the queue, I would like to turn the conference back over to Mr. Martin for additional or closing remarks.
spk06: We would like to thank everyone for their support and for joining us on the 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.
spk07: Once again, this does conclude today's conference. We thank you for your participation.
Disclaimer