CREDIT ACCEPTANCE CORP Q3 FY2024 earnings call

Overall, a mixed quarter with collections and originations as key drivers. 2022 vintage underperformed, and other vintages also declined, but the business model is designed for aggregate acceptable returns. Strong growth in the quarter with highest Q3 unit and dollar volume ever, loan portfolio at $8.9 billion. Market share in core segment 6.2%. Growth slowed due to Q2 forecast changes. Focus on creating intrinsic value and positively impacting constituents: providing valuable product for dealers and consumers, supporting consumers impacted by hurricanes by suspending collection efforts. Financed 95,670 contracts, collected $1.3 billion, paid $71 million in portfolio profit to dealers. Added 1,038 new dealers, with 10,678 active dealers in Q3. Committed to go-to-market approach for product innovation and support, investing in technology team, and recognized as a great place to work with awards.

Credit Acceptance had a mixed quarter regarding collections and originations. The loan portfolio reached a new record high of $8.9 billion on an adjusted basis, up 18.6% from Q3 2023. In the quarter, loan unit volume grew by 17.7% and dollar volume by 12.2%, marking the ninth consecutive quarter of double-digit unit volume growth. The market share in the core segment was 6.2% as of August 31, 2024. Forecasted net cash flows declined by 0.6% or $62.8 million, with 2022 vintage continuing to underperform, while 2021, 2023, and 2024 also saw declines.

Believe they will continue to produce substantial economic profit per share in the future, with worst vintage 2022 still forecasted to produce economic profit. 2022 vintage has less impact on financial results going forward, with 2023, 24, and 25 vintages becoming more influential. Forecasting collection rates is challenging, but the business model is designed for acceptable returns in aggregate even if loan performance is less than forecasted.

Forecast and collection rate estimates are less accurate during volatile periods like post-pandemic. Pandemic and its effects (federal stimulus, unemployment benefits, supply chain disruptions) created volatile conditions impacting competitive environment. Difficulty in accurately forecasting cash flows due to dependent on competitive environment.

Q: Moshe Orenbuch asked about confidence in returns being higher than hurdle rates despite revised estimates and if there's a change in underwriting.

A: Ken Booth said forecasts consider recent performance, models are less accurate in volatile times, '21-'22 cohorts underperformed for multiple reasons, but '22 business is more seasoned and future results will depend on '23, '24, '25 vintages.

Q: John Rowan asked about lower consumer prepayments and what's needed to clear the market.

A: Jay Martin said prepayments are low, near historical lows, factors like negative equity and credit availability contribute, and the business model is designed for aggregate returns even if performance is worse than forecasted.

Q: Rob Wildhack asked about '23 and '24 vintages and if there's another shoe to drop.

A: Jay Martin said '23 and '24 loans are performing better than '22, but '24 is not very seasoned yet, and the business model accounts for variance in loan performance.