Credit Acceptance Corporation

At this time, I would like to turn the call over to Credit Acceptance Chief Financial Officer, Jay Martin.

Thank you. Good morning and welcome to the Credit Acceptance Corporation third quarter 2024 earnings call. As you read our news release posted on the investor relations section of our website at .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 different material that comes out 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 they 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, I will turn the call over to our Chief Executive Officer Ken Booth to discuss the third quarter results. Thanks, Jay. Overall, we had another mixed quarter as it relates to collections and originations, two key drivers of our business. Our 2022 vintage continued to underperform our expectations in 2021, 2023, and 2024 also declined. Overall, a modest decline of .6% or $62.8 million in forecasted net cash flows. As we have previously communicated, historically our models are very good at predicting loan performance and aggregate, but our models work best during less awful times. The pandemic and its ripple effects created volatile conditions, federal stimulus, enhanced unemployment benefits, and supply chain disruptions like vehicle shortages, inflation, etc. All of which impacted competitive conditions. We've had larger than average forecast misses both high and low during this volatile period. But because we understand forecast and collection rates is challenging, our business model is designed to produce acceptable returns in the aggregate, even if loan performance is less than forecasted. Despite the decline in forecast and collections this quarter, we believe we will continue to produce substantial economic profit per share in the future. Even our worst vintage 2022 is still forecasted to produce economic profit. As I 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 seek the best position in the company if access to capital becomes limited. Ultimately, we are happy with the discipline to maintain underwriting standards during the easy money times of 2021 and especially 2022. While our market share was lower during those years, we believe it's a better position to take advantage of more favorable market conditions today. During the quarter, we experienced strong growth and had our highest Q3 unit and dollar volume ever, growing our loan unit and dollar volume by .7% and .2% respectively. This is our ninth quarter in a row with double digit unit volume growth. Our loan portfolio is now at a new record high of $8.9 million on adjusted basis of .6% from Q3 2023. Our market share in our core segment was .2% end of August 31, 2024. Our growth did slow during the quarter, likely impacted by our Q2 forecast changes that result in lower advance rates during Q3. 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 five 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. This allows dealers to make incremental sales with roughly 55% of adults with other than prime credit. For these adults, it enables them to obtain a vehicle to get to their jobs, take their kids to school, etc. It also gives them the opportunity to improve or build their credit. We recognize that it's been a challenging time for consumers impacted by recent hurricanes. As we have for many years, we are working with these consumers, including suspending some of our collection efforts. To allow these customers. To prioritize their safety and most urgent needs. During the quarter, we financed 95,670 contracts for our dealers and consumers. We collected 1.3 billion overall. And paid 71 million in portfolio profit, portfolio profit express to our dealers. We added 1,038 new dealers for the quarter and now have our largest number of active dealers ever for a third quarter with 10,678 dealers. From an initiative perspective, we are committed to improvement through our go to market approach aimed at providing product innovation and support to our dealers faster and more effectively than ever before. This requires teamwork, attention to detail and an interim process that attempts to make improvement every step of the way. This is a work in progress, but we are getting better. We are also continuing to invest in our technology team. We have improved our teams capabilities and are focused on modernizing both our key technology architecture and how our teams perform work with the goal of increasing the speed at which we enhance our product for dealers and consumers. During the quarter, we received four awards from Fortune, USA Today and People Magazine recognizing us as 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 to what makes a difference to them. In connection with their efforts, we contributed to organizations such as 42 Strong, American Foundation for Suicide Prevention, Atlanta Area School District, Children's Hospital of Michigan and Pure Heart Foundation. Now, Jay Martin and I will take your questions along with Doug Fusk, our Chief Treasury Officer, Jay Brinkley, our Senior Vice President and Treasurer and Jeff Soutar, our Vice President and Assistant Treasurer.

If you'd like to ask a question at this time, please 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 Mosha Ormba with TD Cowan.

Great, thanks. I appreciate the comment that you're confident that the returns are higher than your hurdle rates, but I guess maybe could you just spend a little more time on that idea because they're all based upon estimates and the estimates have been revised down for six quarters. So, I guess, you know, I mean, you know, the real question is, you know, how do you know and what is it, you know, are we going to be having the same conversation, you know, 90 days from now? Like, how should we think about that?

So, our estimates in our third quarter release represent our best estimates of how we believe these loans are going to perform in the future. That considers the underperformance we've seen today post pandemic vintages. To your point about what do we expect to see in the future, I would say our forecasting models perform faster in relatively stable economic periods. What are, as Ken said, are less accurate during periods of volatility that we've experienced since the

pandemic.

Let's say the biggest declines we saw in the quarter related to the 21 to 22 cohorts. Tough to say precisely why these have continued to underperform, but we know there are likely multiple contributing factors, including that these loans were originated during a very competitive period, which generally hurts loan performance. Consumers purchase vehicles at peak valuations, vehicle prices subsequently declined, and then the impact of inflation. We understand that others in our industry have experienced similar or worse performance on these cohorts, so we don't believe this trend is unique to credit acceptance. As it relates to the 21 and 22 business, as we point out that that business is more seasoned. We've collected 81% of what we ultimately expect to collect in the 21 business, 61% of what we ultimately expect to collect in the 22 business. Going forward, those cohorts are going to have less of an impact on our financial results.

We're

going to have more of an impact on our financials based on how our 23 and 24 loans perform. Because we wrote more business in those years and those loans are also seasoned and then as we get into the next year, it will be more weighted to what we write in 25.

Right. I guess I would just maybe tack on to that the idea that it isn't so much about volatility, it's about different factors affecting what has driven consumer behavior in this cycle versus previous cycles. And I guess it just pushes me to this question of, is it an estimation problem or is it actual underwriting problem? Have you thought about changing the way you actually underwrite these loans?

Let's say our forecast, we continue to consider recent performance. So as we're originating new loans, we've considered the underperformance that we've seen in these 21 and 22 loans. So we've adjusted and lowered our initial estimates on those future loans to consider that. So we believe we are considering the underperformance there. And as I mentioned before, we don't believe this is a problem unique to credit acceptance. We believe we're seeing this across the industry. Right. Okay. All

right. And then just last one for me, you know, you didn't buy back any stock in the in the third quarter or in October to date from the filing of the Q it looks like. So you just talked a little bit about, you know, capital. It looks like loan growth is strong, but decelerated a little. So you just talk about that?

Sure. As we've said many times over the years, our first priority is to make sure we have the capital that we need to fund the business. If we feel we have excess capital, then we'll take a look at the stock price. And if we think we can buy it for less than intrinsic value, we'll return capital to shareholders. For most of Q3, we had higher outstanding balances on our revolving credit facilities than we customarily do. Now that situation was remedied at the very end of September when we did a relatively large ABS deal. So given the fact we had more revolver usage and the leverage at the end of Q3 is at the high end of the historical range. And given, you know, uncertainties about collection performance and capital market conditions in light of the election, we took a bit more of a conservative approach. As you know, we've repurchased a significant number of shares over a long period of time, over 30 million shares since, you know, the late 90s. But we don't do it consistently. Some periods we buy back a lot, some periods we buy back very little. So I don't think that you can take a look at one quarter and assume that's the basis for a new trend line. Thanks very much.

Our next question comes in the line of John Hecht with Jeffries.

Morning guys.

Thanks. Hello?

John, you may have muted your line.

Our next question will come from... Sorry guys. We have a question from the line of John Rowan with Jenny Montgomery-Scott.

Good morning. I guess I just want to drill down a little bit into what, you know, lower consumer prepayments means. I mean, we've asked on the call before, is that, you know, related to lower, you know, lower repossession, lower wholesale repossession. But I guess drill down a little bit. Like, what is it? Is it... Are you not getting the judgments you need when you go and you sue someone for, you know, for a deficiency? Is it just consumers not paying on, you know, older debts, you know, that are in the tails? Or is it really just... Or has there been just a wholesale change in the number of consumers who are defaulting on loans? I'm just trying to get a better understanding of what that fairly generic term means.

Yeah, it's primarily referring to consumers refinancing their loans and moving on to either traditional forms of financing or purchasing a new car. In periods where there's limited availability of the credit to consumers, we tend to see lower levels of prepayments. And that's what we're currently seeing. OK.

And... But that's driving a lot of forecast revisions. But, I mean, look, I've covered the company for a long time. There have been periods in which there's been, you know, absolutely no credit availability, right? And, you know, to consumers, even, I mean, even much worse than right now. How does that compare historically to those periods?

I would say we're in near historical lows there currently. So we have seen similar low periods, but this is one of the lower periods that we've seen. And, you know, our forecast uses more of a historical average of what we've seen with prepayments. We've seen that come down, which pushes our cash flows out in the future, which lowers the yield that we'll realize on the loans. OK.

All right. Thank you. I

would just add that, you know, forecasting the timing of cash flows is challenging since it's dependent on the competitive environment. And no one can really, you know, forecast how competitive the environment is going to behave in the future. So it is challenging, you know. I think we take our, you know, best crack at it, but it's tough.

But actually, let me ask another question. So if people are refinancing their cars, is that, why is that? Is that a function of used car prices, that they're sitting on a negative equity position and they don't want to refinance the car and owe some money? Or what is driving that lower level of refinancing activity?

Yeah, I think that certainly could be a factor. And I think just the general availability of credit to the consumer is also a factor. The factors you mentioned are contributing factors.

All right. Thank you. Our next question comes from John Hecht with Jefferies.

Morning, guys. Apologize for the technical issue earlier. I just kind of follow on questions for both the preceding questions. I know this cycle is unique, but in historical cycles where your capital was scarce and maybe there was disruption in the environment, those tended to be favorable environments for you. As an example, thinking about post the great financial crisis, this one continues to be challenged. I guess the question is, what do you guys think has to happen to clear the market out to the point where it is an opportunistic environment for you? Is it simply just work through the 22 vintage? Do residual prices need to come down further? Or what other factors might we look out for?

I think it's primarily continuing to adjust our loan forecast when we're originating new loans to consider the performance we've seen. And that's what we've continued to do. I mentioned earlier, the 22 loans have a less significant impact on our financial statements going forward. Our results will be more based on how our 23 and 24 business performs and going into the next year, how our 25 business performs. But we, as Ken mentioned, we know that forecasting collection rates are difficult. So we have a business model designed to produce acceptable returns in aggregate, even if loan performance is worse than forecast. So we'll continue to take that approach as we move forward.

OK, thanks. Our next question comes from a line of Robert Wildhack with

Autonomous Research.

Morning, guys. Question on the 23 and 24 vintage is specifically, with second quarter earnings, I think you mentioned that you expected 23 and 24 to behave similarly to 22. As it stands today, though, forecasted collections are four and six percentage points higher for 23 and 24, respectively, versus 22. How should we square that difference? Do you think there's another shoe to drop with respect to 23 and 24? And if so, when do you think that could happen?

Yeah, I think it's difficult to look at just the absolute collection rate because we've originated different mixes of business during those years. I think we need to look at our variance to our initial forecast. And you'll see that's currently lower on the 23 and 24 loans. And part of that's due to us having lowered our initial estimates on the 23 and 24 loans when we have originated that, because we started to see some underperformance on the 21 and 22 loans. We considered that. And then we're also looking at the trends of what 23 has done so far versus 22. And we know those loans performing better. So based on those two factors, we believe that the 23 business and the 24 business perform better than the 22 business. But I would also point out, you know, especially the 24 business is not very, very seasoned at this

point. Yeah. And I would just add that we said in prior calls that we were observing a similar trend in underperformance on the 23 and 24 loans, though that trend was less severe on the 22 loans. So we were seeing a similar pattern, but less severe. And then to Jay's point, you know, we adjusted our forecast for a forecast on 23 and 24 was more conservative than 21 and 22.

OK. How do the recent hurricanes, how will those impact forecasted collections, if at all?

You know, the hurricanes impacted mainly Florida and North Carolina. Those two states are about 4.2 and 1.5 percent of our portfolio. But obviously, the hurricanes did impact the entire state. So overall, they're really not that material impact to our portfolio. That said, they've been incredibly impactful for people in the direct path. So consistent with our approach for many years, we're working to get those impacted by the hurricanes in ways to help them get back on their feet.

If I could just sneak one more in and ask Ken about something you highlighted earlier, specifically that the 22 vintage would still generate economic profit. I was wondering if you could give some more context there, like how much more economic profit does a good vintage like say, 2019 generate versus 2022?

I mean. You know, we've got wide variance of economic profit. Obviously, 2019 was buoyed by stimulus payments and it over collected. I don't really want to get into details of our kind of profitability by vintage, but. You know, I guess what I would say is, you know, 2019 was a highly profitable vintage and 2022 is a lesser profitable one, but they all produce economic profit, which means they're all profitable.

Okay, thank you.

As a reminder, if you'd like to ask a question at this time, please press star one one on your touchtone phone. Our next question comes from the line of Ryan Shelley with Bank of America.

Hey guys, quick question here. So the active dealer count has come down a few quarters now. Can you just touch on what's driving that? Is that like a function of the software market? Or being more selective, just any color there would be great.

You know, I think at the dealer counts. It is fairly flat to be honest. It was higher in the first quarter due to seasonality. I would say in terms of the competitive environment. You know, for a while, it seemed like a lot of people were pulling back. Seems like that subsided somewhat and maybe the competitive environment is returning more to a normal environment. You know, our net income, we've still been able to grow our market share and we've been able to, you know, we're on pace for our highest volume year ever. So it feels good about where we're at in terms of the competitive environment and how we're able to grow the business.

Got it. Got it. And then just one more quickly, if I could see of a bond maturity in March 26, but it's callable at par now. How should investors think about your thought process around addressing that? Thanks.

Right, yeah. We're watching market conditions there very closely.

Two good

facts with that. Bond tranche. You know, first, we have plenty of time. It doesn't mature until March of 2026. So a year and a half to do something. The other good fact there is relatively small, 400 million. So it's small relative to the size of our balance sheet and our liquidity. So we have plenty of options. We can refinance it in the senior no market and we can refinance it using securitization or we can just draw on our existing liquidity. Rates for a new bond issue would probably be higher than that coupon that's on those notes today. So we're not in a rush to do anything with it. So we'll continue just to monitor it and do something appropriate before the maturity.

Understood. Thank

you. Our next question comes from the line of John Rowan with Janie Montgomery Scott.

Hey guys, just one follow up. You know, the 2022 vintage is now sitting at a .2% spread versus an initial of 20.1. Obviously, it's a relatively big decline. But how do we think about, you know, where the level of economic profit doesn't become justifiable, right? I mean, .2% spread, if that's a proxy for the internal rate of return to that pool. You know, do we just look at that number to go down to the to your funding costs or, you know, where does that, where does that number become, you know, uneconomical to you?

I mean, it depends on which program you're talking about. So, you know, on the purchase program, you know, 1% decline in the forecasted collection rate, you know, your tax affect that and you have to account for timing. But, you know, that ends up driving a reduction in our, in our return. The portfolio program is a little bit more complicated to think about. Because, you know, the shortfall of collections is shared, you know, on an 80-20 basis with the dealer up to a certain point. So the portfolio program insulates us in variations of consumer loan performance where the purchase program doesn't. So the purchase program is obviously a lot more sensitive. Our profitability on the purchase program is more sensitive to declines in forecast collection rates than is the portfolio program. Okay, all right. Thank you.

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

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 Invest Relations mailbox at IR at CreditAcceptance.com. We look forward to talking to you again next quarter. Thank you.

Once again, this does conclude today's conference. We thank you for your participation.