Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Credit Acceptance Corp (CACC, Financial) experienced strong growth, achieving its highest Q2 unit and dollar volume ever, with loan unit and dollar volume growing by 20.9% and 16.3%, respectively.
- The loan portfolio reached a new record high of $8.6 billion on an adjusted basis.
- Market share in core segments increased to 6.6% as of May 31, 2024.
- CACC added 1,080 new dealers during the quarter, reaching the highest number of active dealers ever for a second quarter with 10,736 active dealers.
- The company received three awards from Fortune, US News, and the Best Practices Institute, recognizing it as a great place to work.
Negative Points
- 2022 vintages continued to underperform expectations, and the 2023 vintage began to slip as well.
- A $147 million adjustment to forecasted net cash flows was required for loans originated in 2022, 2023, and the first half of 2024.
- Forecasting collection rates remains challenging due to volatile conditions, including the pandemic's ripple effects, federal stimulus, and supply chain disruptions.
- The yield on the loan asset was 17.7%, and revenue as a percent of average capital was 19.6%, with expectations of a decline in Q3.
- Concerns were raised about the sustainability of originating more loans given the underperformance of previous vintages, questioning whether the company should pull back.
Q & A Highlights
Highlights from Credit Acceptance Corp (CACC) Q2 2024 Earnings Call
Q: Is there any way to 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?
A: (Douglas Busk, Chief Treasury Officer) We now believe that the 2022 originations are seasoned enough for us to enhance our estimate over what we provided previously. We have assumed that the '23 and '24 originations will exhibit similar trends in terms of variance from the initial forecast of the slope of the collection curve. The adjustments in percentage terms are less significant for '23 and '24 compared to '22.
Q: Given that this is the second of these in basically a year, why is it a good thing that you're originating more loans? Shouldn't you be pulling back?
A: (Douglas Busk, Chief Treasury Officer) We still believe that these loans are producing returns in excess of our weighted average cost of capital. We feel better about the '23 and '24 loans compared to the '22 loans, which were disappointing. We think it's adding shareholder value to continue originating the business we're originating.
Q: The implied spreads for 2024 are still high. What gives you confidence that those are the right numbers, given the magnitude of the reductions you're putting into the prior forecast revisions?
A: (Douglas Busk, Chief Treasury Officer) We're basing our current estimate for '23 and '24 on the absolute performance to date of those vintages and applying a similar degradation in the collection rate over time to what we've seen on '22. Forecasting consumer loans has been challenging, but we're putting our best number on it.
Q: Some other lenders have talked about the early part of 2023 driving underperformance for that vintage. Would you echo that?
A: (Douglas Busk, Chief Treasury Officer) Yes, that's a fair comment. The first part of '23 loans underperformed compared to the second half. This trend has continued into 2024.
Q: Can you explain the rationale behind the amendments to the revolving credit agreement and one of the warehouse agreements around the definition of consolidated net income?
A: (Douglas Busk, Chief Treasury Officer) We believe the best way to evaluate our financial performance is on the basis of level yield accounting based on forecasted cash flows. The adjustments to the definitions in those credit facilities start with GAAP net income, back out the provision for credit losses, and apply floating yield adjustment to get to level yield revenue recognition based on forecasted cash flows.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
