Credit Acceptance [CACC] Conference call transcript for 2022 q2
2022-08-01 21:18:03
Fiscal: 2022 q2
Operator: Good day, everyone, and welcome to the Credit Acceptance Corporationâs Second Quarter 2022 Earnings Call. Todayâs call is being recorded. A webcast and transcript of todayâs earnings call will be made available on Credit Acceptanceâs website. At this time, I would like to turn the call over to Credit Acceptanceâs Chief Treasurer Officer, Doug Busk.
Doug Busk: Thank you. Good afternoon and welcome to the Credit Acceptance Corporationâs second 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 SECâs Regulation G, please refer to the financial results section of our news release, which provides table showing how non-GAAP measures reconcile to GAAP measures. Our GAAP and adjusted results for the quarter include: unit and dollar volumes grew 5.1% and 22% respectively as compared to the second quarter of 2021. A decrease in forecasted collection rates for loans originated in 2020 through 2022, which decreased forecasted net cash flows from our loan portfolio by $43 million. Adjusted net income decreased 18% from the second quarter of 2021 to $188 million. Adjusted earnings per share increased 1.5% from the second quarter of 2021 to $13.92. Stock repurchases of approximately 404,000 shares, which represented 3% of the shares outstanding at the beginning of the quarter and a $12 million expense related to an agreement in principle to settle a previously-disclosed class action lawsuit, and a $20 million increase in stock-based compensation expense primarily due to the retirement of our former CEO in May 2021 and the timing of shareholder approval for 2020 and 2021 stock option grants. 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: And thank you. And our first question comes from Moshe Orenbuch from Credit Suisse. Your line is now open.
Moshe Orenbuch: Great, thanks. In the last quarter you guys talked a little bit about your results and what you were doing with respect to kind of the higher credit quality. I guess Iâm trying to understand you do have your adjusted revenue or the yield as a percentage of your average capital did go up in the quarter. Could you just kind of square for us how to think about that? Whatâs happening in terms of the actual yield on the portfolio, or is that a function of the denominator? Could you talk about that a little bit? Thanks.
Jay Martin: Yes, the adjusted yield on the portfolio increased this quarter and that was primarily due to loan performance in Q1 being quite a bit better than we would expect, or we expected. As you can see in the press release loan performance, slightly underperformed our expectations this quarter all else equal that will have a negative impact on the yield in future periods.
Moshe Orenbuch: Got it. Thanks. But youâre saying itâs separate and distinct from the mix in terms of kind of higher quality loans that you were originating.
Jay Martin: Correct. Yes.
Moshe Orenbuch: Thanks.
Jay Martin: Itâs all relative to our initial expectations and what happened during the period.
Moshe Orenbuch: Got you. And I guess when you think about that, because like sometimes you talk about like a change in methodology that results in that, there was no mention of that this time. So, is there anything that you could kind of point to as like the root cause of that under performance kind of changing from first quarter to second quarter you had said it was better than expected in the first quarter?
Jay Martin: Yes, itâs tough to say precisely why it occurred. But itâs likely due to a few factors. Obviously, the end of stimulus and supplemental unemployment benefits, and perhaps it took a little while for consumers to work through the savings that they had accumulated during those programs. And then I think the other thing thatâs impacting the consumer out there is just the inflationary environment.
Moshe Orenbuch: So is it reasonable to expect that that would continue into future quarters?
Jay Martin: I canât predict the future any better than anyone else, but I guess my expectation is as long as inflation remains elevated and nothing else changes in a material way that I think thatâs probably a reasonable assumption. I mean, I think that we had a two-year period where loan performance was significantly better than expected and those tailwinds are no longer present and there are some potential headwinds such as inflation.
Moshe Orenbuch: Got you. And then last one for me is that it also just does seem that it roll â kind of rolled through the second quarter, same sort of pace that your capital return was slowing. And itâs been June, July probably pretty much de minimis, kind of thoughts there as we go forward.
Ken Booth: Okay. Weâre back on, Moshe, Iâm not sure how much of my response there you heard or didnât hear. But I guess, Iâll just assume you didnât hear very much of it. And I would say that, as we said on prior calls, historically we returned less capital to shareholders, the higher our leverage is and the more weâre growing. And in recent periods, our leverage has been at the high end of the historical range. And in the second quarter we started to see some more positive results from a loan growth perspective.
Moshe Orenbuch: Great. Thanks Doug and Ken. Thank you.
Ken Booth: Sorry about the interruption.
Moshe Orenbuch: No problem.
Operator: And thank you and one moment for questions. And our next question comes from Ray Cheesman from Anfield Capital Management. Your line is now open.
Ray Cheesman: Doug, you mentioned that inflation is a headwind, is the Manheim index finally showing some softness in the used car market where I believe most of your portfolio exists? Is that an impact that also will be a headwind going forward versus the terrific lift it gave over the last eight or 10 quarters?
Doug Busk: We havenât seen any material move in used car prices relative to the vehicles that were disposing of at auction. But it certainly is a potential headwind. Used car prices continue to be at elevated levels, I canât predict the future, but at some point it seems reasonable to expect that theyâd revert to more normal levels, but how quickly and how dramatically that occurs is anyoneâs guess.
Ray Cheesman: Okay. Also you guys took off the COVID overlay, I guess in the first quarter. And as we look forward and I know, youâre not a big fan of looking â telling us forward, but when I have guys like AT&T telling me that they got customers who canât pay for their cell phones, thatâs new news. And so and then you clearly see the bottom portion of the FICO scale struggling as you mentioned, inflation amongst other things, less government support programs, et cetera. You also said that the last two years have been a different time. When do we get back to old normal where performance say from 2015 to 2020 prior to COVID is what we would expect to see going forward? And these â this weird two years kind of flows through and finishes, does it take two quarters, six quarters, 12 quarters?
Doug Busk: I donât think anyone really knows. I mean I guess it define â it depends on what you define as normal, but weâre a little more normal and that we no longer have stimulus and unemployment benefits, but weâre definitely abnormal. And weâre experiencing the highest inflation since the 1980s. So we continue to be in unusual environment. And when that returns to normal is anyoneâs guess.
Ray Cheesman: Are there any â Iâll give you an example, one main the spring leaf lenders that also lend to lower FICO customers has changed the credit box and âtightened things upâ. Are there adjustments that Credit Acceptance is making to its ongoing business model to try to stay ahead of any changes that they expect to occur in the couple quarters ahead?
Doug Busk: Weâre always attempting to forecast collection rates as accurately as possible. And to the extent that, we need to make changes to do so. We do that. Itâs our practice not to provide details relative to any adjustments that we do make.
Ray Cheesman: Thank you and congratulations by the way on finding middle ground on that lawsuit and putting it aside.
Doug Busk: Thank you.
Operator: And thank you. And our next question comes from Matthew Hewitt from Jefferies. Your line is now open.
John Hecht: Actually, itâs John Hecht Jefferies, but thanks for taking my questions. I guess I just broadly speaking, just because they were most of us are aware that the capital markets are a little bit in disarray spreads widening. And just how does that impact kind of the management thinking there in terms of volumes and so forth is, do you â you guys have been serial issuers with a big buyer base, but does the current state of the capital markets affect your thinking at all?
Ken Booth: Certainly, weâve noticed â we completed the deal recently and the capital markets are functioning differently than they were six to 12 months ago. So weâre aware of it. And weâre monitoring it closely, so weâre factoring it into the way weâre running the business for sure.
John Hecht: Okay. And then the spread â as you guys kind of highlight the spread and the different course of its â on both the purchase and the dealer program, as the spreads â certainly as long as I can remember a low level. Any comments are in that or should we think that weâre bottoming out here kind of, I guess, the way youâre underwriting and issuing, how do we think about where the spread might go?
Ken Booth: We typically donât discuss our pricing strategy other than to say, weâre always trying to maximize the amount of economic profit that we originate. And so that would be economic profit per loan times the number of loans we originate. So if we felt that it made sense to pay more, have a lesser spread, but right more business, we do that conversely. If we thought it made sense to pay a little less and have a larger spread, but do a little less volume, weâd do that too. So weâre trying to price the product optimally.
John Hecht: Okay. And then last question, and I know thereâs some seasonal elements to this and that, but you had pretty big info of new dealerships. How do we think about that?
Ken Booth: I think a lot of that is probably just due to the fact that the sales team has been able to get out and have a lot more face to face dialogue with dealers than they were over the last year or two. Youâve also had, what appears to be a somewhat of an improvement in the competitive landscape, which generally seems to increase dealerâs interest in our program as well. So I think itâs likely a combination of those two things.
John Hecht: Okay. Thanks very much.
Doug Busk: You bet.
Operator: And thank you and one moment for our next question. And our next question comes from Diogo Vaz da Silva from PSquared Asset Management. Your line is now open.
Diogo Vaz da Silva: Hi. Thank you very much for taking my questions. I have three of them please. The first one is then and pulling up on the previous one. One thing Iâve noticed is that over the last two years, weâve seen both the spread going down, but at the same time, the average long-term going up. Is this just related with the car, especially on the term related with the car prices being at much higher levels or, I mean, Iâm just trying to understand, is this the model being very different or is just the industry getting more competitive?
Ken Booth: I mean, I think the loan size has gone up because of the elevated used car prices. The term is remained about the same and thatâs just due to the fact that weâre financing a slightly different vehicle just to address consumersâ affordability concerns. Your other question related to the spread, the spread has declined over the last couple years, but a pretty significant reason for that was the better than expected performance for the loans originated in 1920 into a lesser extent, 2021.
Diogo Vaz da Silva: Got it. And then on my last question, which is, it has two parts with your existing kind of disclosures on potential legal risks. I guess the first part is, is there any part of your recent settlements on state losses, did you guys have to introduce any sort of affordability test? Or did you have to change the way that you conduct your business in those states by any form? Because when I was reading through the settlement, I only saw that there was that the penalties, but I didnât see that there was anything, any changes in the business itself?
Ken Booth: I mean the, youâre basically correct. No material changes, we made some changes back in 2018 to modified business practices in light of some court rulings. But other than that, the settlements themselves didnât require significant modifications in business practices.
Diogo Vaz da Silva: Perfect. And then the last part of the question, if I may just, is there any update on the discussions and interaction you guys are having with the CSPB regarding the notice that they served to you in the beginning of this year?
Ken Booth: I mean, we canât really comment beyond what weâve disclosed in our 10-Q.
Diogo Vaz da Silva: Understood. Thank you very much.
Operator: Thank you. And our next question comes from Robert Wildhack from Autonomous Research. Your line is now open.
Robert Wildhack: Hi guys. Doug, can you expand on that point, you made a moment ago about the improved competitive landscape?
Doug Busk: I mean, the way that we conclude that itâs improved as we look at our volume per dealer, which improved a little bit in the quarter. We also get anecdotal feedback from our sales team and from dealers. It seems like the competitive environment has improved some exactly why itâs difficult to say, but I think likely candidates are increases in interest rates, the choppiness in the capital markets we discussed earlier and potentially operators being concerned about future trends in credit due to things like, inflation and potentially declining used car prices. I mean, itâs tough to know precisely, but those seem like good candidates for any improvement that might be out there.
Robert Wildhack: Okay. Got it. Thanks. And then I also wanted to ask you about the leverage . First, do you have any firm caps on leverage, whether thatâs a management or covenant driven?
Doug Busk: We donât have firm caps from a management perspective. We obviously have financial covenants that we need to adhere to.
Robert Wildhack: Can you just let us know what those covenants are?
Doug Busk: Yeah. I mean, theyâre public in our debt documents. So under our current accounting thatâs existed 01/0/1/2020. We have a net funded debt-to-equity ratio of 5.6:1 under our senior notes. We canât make a restricted payment, which is basically a buyback. If the effect of such payment would be to cause our net funded debt-to-equity. So debt less unrestricting cash to exceed 3.25:1 on the accounting that existed at the time of issuance, so pre 01/01/2020 accounting.
Robert Wildhack: Okay. Thatâs a good segue to my next question actually. So that cap might not be impacted so much by the GAAP provision as you start to grow again, where the GAAP provision was weighing on you building retained earnings equity, is that right?
Doug Busk: Thatâs correct. The timing of income recognition under CECL is significantly different than it was under our prior basis of accounting.
Robert Wildhack: Okay. Thanks. And then if I could just ask one more quick one. I noticed that for the past few quarters, other income has been benefiting from a decrease in average claim rates on the GAP contracts. If I think about the elevated cost of replacing a car, Iâd expect folks to be pretty eager to make a claim on those contracts. So what do you think is the driver of the decrease in claim rates lately?
Doug Busk: Well, I think, actually the provision for claims thatâs included in our income statement is on one of our vehicle service contract products. And I believe that claim rates or claims as a percent of premiums earned were actually up this quarter. So two different products you have guaranteed asset protection which include â is included in other income and ancillary product profit sharing. And then you have the provision for claims on one vehicle service contract product that is go-through the provision for claims line.
Robert Wildhack: Okay. That makes sense. Thank you.
Operator: And thank you. And our next question comes from John Rowan from Janney. Your line is now open.
John Rowan: Good afternoon guys. Doug, I just want to â I just want to make sure I understood your earlier comment on inflation and how it impacts your consumers because it sounded like you were talking about whether or not it impacted the vehicle prices. And obviously for a long time weâve had a conversation about vehicle prices not having a big impact on your company. Were you really only talking about payment rates? Or are we talking about repossession and a change in repossession rates and severity? Thank you.
Doug Busk: No, I was talking about it impacting the customerâs ability to pay. If theyâve got to spend money for gas and their food bill costs more thatâs what I was talking about.
John Rowan: Okay. Thank you. Because there was a whole conversation with the Manheim in there as well. So I just wanted to make sure I understood what you were talking about. Thatâs my only question. Thank you.
Doug Busk: Okay. Thanks John.
Operator: And thank you. And we have a follow up from Ray Cheesman from Anfield Capital Management. Your line is now open.
Ray Cheesman: Doug, one of the â one of the other people who also is in the lending business that youâre in indicated recently from a competitive standpoint that the credit unions were used some words that verged on out on control where everybody else was raising rates to accommodate changes in the market rate structure, and credit unions were in its opinion very much more aggressive than they should be. I was just wondering if you see anything like that? Or if youâve said to me in the past that generally when economic conditions get less great, some of the easy, the lazy capital pulls back, and lets you guys do better? Any comment on that thought.
Doug Busk: Credit unions have generally written a lot of subprime auto finance business over time. Iâm not close enough to the data to really say whether theyâve gotten materially more aggressive in the current environment or not. Iâm sure our analytics people know the answer to that, but I havenât asked them that question.
Ray Cheesman: Thanks very much. And thank you. With no further questions in queue. I would like to turn the conference back over to Mr. Busk for any additional or closing remarks.
Doug Busk: Weâd like to thank everyone for their support and for joining us in our conference call today. If you have any additional follow up questions, please direct into our investor relations mail box at ir@creditacceptance.com. We look forward to talking to you again next quarter. Thank you.
Operator: Once again, this does conclude todayâs conference. We thank you for your participation.