Release Date: October 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 with the highest Q3 unit and dollar volume ever, growing loan units and dollar buy by 17.7% and 12.2%, respectively.
- The loan portfolio reached a new record high of $8.9 billion, marking an 18.6% increase from Q3 2023.
- CACC added 1,038 new dealers during the quarter, achieving the largest number of active dealers ever for a third quarter with 10,678 dealers.
- The company continues to focus on product innovation and support for dealers and consumers, aiming to improve intrinsic value and positively impact key constituents.
- CACC received four awards from Fortune USA Today and People Magazine, recognizing it as a great place to work, highlighting its commitment to a positive workplace culture.
Negative Points
- The 2022 vintage of loans continued to underperform expectations, with similar declines observed in 2021, 2023, and 2024.
- Forecasted net cash flows declined modestly by 0.6% or $62.8 million, indicating challenges in predicting loan performance during volatile economic conditions.
- Lower consumer prepayments have been observed, which are near historical lows, impacting cash flow timing and yield realization on loans.
- The company did not repurchase any stock in the third quarter or in October, citing higher outstanding balances on revolving credit facilities and uncertainties in collection performance.
- The competitive environment remains challenging, with the company needing to adjust loan forecasts to account for underperformance in previous vintages.
Q & A Highlights
Q: Can you elaborate on your confidence that returns are higher than hurdle rates despite revised estimates?
A: Jay Martin, CFO, explained that the estimates in the third quarter release reflect their best judgment on loan performance, considering past underperformance. Forecasting models work best in stable economic periods, and the pandemic has introduced volatility. The 2021-2022 cohorts have underperformed due to competitive conditions and inflation, but these cohorts are now more seasoned and will have less impact on future results. The focus is shifting to 2023 and 2024 loans, which are expected to perform better.
Q: Is the issue with loan performance an estimation problem or an underwriting problem?
A: Jay Martin, CFO, stated that they have adjusted their forecasts for new loans to account for past underperformance. They believe the issue is not unique to Credit Acceptance and is seen across the industry. The company has adjusted its initial estimates for future loans to reflect recent performance trends.
Q: Why didn't you buy back any stock in the third quarter?
A: An unidentified company representative explained that their priority is to ensure they have the capital needed to fund the business. They had higher revolving credit balances in Q3, which were addressed by a large ABS deal at the end of September. Given the high leverage and uncertainties in collection performance and capital markets, they took a conservative approach. Historically, they have bought back shares inconsistently, depending on capital availability and stock price.
Q: What does "lower consumer prepayments" mean, and how does it affect forecasts?
A: Jay Martin, CFO, clarified that lower consumer prepayments refer to fewer consumers refinancing their loans or purchasing new cars. This is due to limited credit availability. Historically, prepayments are at a low, which pushes cash flows into the future and lowers loan yields. Forecasting cash flow timing is challenging due to the competitive environment.
Q: How do recent hurricanes impact forecasted collections?
A: Kenneth Booth, CEO, stated that the hurricanes mainly affected Florida and North Carolina, which represent a small portion of their portfolio. The overall impact is not material, but they are working to assist affected consumers.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
