Participants

Jay Martin; Chief Financial Officer; Credit Acceptance Corp

Kenneth Booth; President, Chief Executive Officer, Director; Credit Acceptance Corp

Moshe Orenbuch; Analyst; TD Cowen

John Hecht; Analyst; Jefferies

John Rowan; Analyst; Janney Montgomery Scott LLC

Robert Wildhack; Analyst; Autonomous Research

Ryan Shelley; Analyst; Bank of America

Presentation

Operator

Good day, everyone and welcome to the Credit Acceptance Corporation third quarter 2024 earnings call. Today's call is being recorded a webcast and transcript of today's earnings call will be made available on Credit Acceptance's website.
At this time. I would like to turn the call over to Credit Acceptance Chief Financial Officer, Jay Martin.

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 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 SECs 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.

Kenneth Booth

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 0.6% or $62.8 million and 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 fast during less volatile times.
The pandemic has ripple effects created volatile conditions, federal stimulus, enhanced unemployment benefits and supply chain disruptions like the vehicle shortages, inflation, et cetera, all of which impacted competitive conditions. We've had larger than average forecast misses both high and low during this fall 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 forecasted 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've 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 in the industry, we price to maximize economic profit over the long term and seek the best position, the company if access to capital becomes limited.
Ultimately, we're 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 this was a better position to take advantage of more favorable market conditions today.
During the quarter, we experienced strong growth that had our highest Q3 unit and dollar fine ever growing our loan and unit -- our loan unit and dollar buy by 17.7% and 12.2%, respectively. It's our ninth quarter in a row with double digit unifying drills.
Our loan portfolio is now at a new record high of [$8.9 billion] on an adjusted basis of 18.6% from Q3 2023. Our market share in our core segment was 6.2% as of August 31, 2024. Our growth did slow during the quarter likely impacted by our Q2 forecast changes that resulted 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 of 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, et cetera. It also gives them the opportunity to improve or build their credit.
We recognize that it's been a challenging time for our 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] of portfolio profit expressed 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 for our viewers faster and more effectively than ever before. This requires teamwork attention to detail and enter a 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 continued investing in our technology team. We've improved our team's capabilities and are focused on modernizing both our key technology architecture and how our teams performed 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 and 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 Douglas, our Chief Treasury Officer; Jay Brinkley, our Senior Vice President and Treasurer; and Jeff Soutar, our Vice President And Assistant Treasurer.

Question and Answer Session

Operator

(Operator Instructions)
Moshe Orenbuch, TD Cowen.

Moshe Orenbuch

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, I mean, the real question is how do and what is it -- are we going to be having the same conversation, 90 days from now? Like how should we think about that?

Jay Martin

Yes. 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 on the post pandemic vintages.
To your point about what do we expect to see in the future? I would say our forecasting models perform best or relatively stable economic periods for this concept that 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 they're 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 to '22 business.
As we point out that those, 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 on 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 season and then as we get in the next year, we'll be more weighted to what we write in '25.

Moshe Orenbuch

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?

Jay Martin

Let's say our forecast, we continue to consider recent performance. So as we're originating new loans, we've considered the other performance that we've seen in these '21 and '22 loans. So we've adjusted and lowered our initial estimates on future loans to consider that.
So we believe we are considering the other performance there. And as I mentioned before, we don't believe this is a problem you need the credit acceptance. We believe we're seeing this across the industry (multiple speakers) as quarterly moving forward.

Moshe Orenbuch

All right. And then just last one for me, you didn't buy back any stock in the third quarter or in October to date from the filing of the queue it looks like. So you just talk a little bit about 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 a higher outstanding balances on our revolving credit facilities than we customarily do.
Now, that situation was remedied at the very end of September, we'll need a 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 uncertainties about collection performance and capital market conditions in light of the election.
We took a bit more of a conservative approach. If we purchased a significant number of shares over a long period of time, over 30 million shares since, 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.

Moshe Orenbuch

Got it. Thanks so much.

Operator

John Hecht, Jefferies.

John Hecht

Morning guys. Thanks.

Operator

John, you may have muted your line.
John Rowan, Janney Montgomery Scott.

John Rowan

Good morning. I guess, I just wanted to drill down a little bit into what lower consumer pre payments means. I mean, we've asked on the call before is that related to lower repossession, lower wholesales after 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 a deficiency? Is it just consumers not paying older debts 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? So I'm just trying to get a better understanding of what that fairly generic term means.

Jay Martin

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 now.

John Rowan

Okay. 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, absolutely no credit availability, right. And to consumers even, I mean, even much worse than right now. How does that compare historically to those periods?

Jay Martin

I would say we're 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 our forecast uses more of a historical average of what we've seen with prepayments. And we've seen that come down, which pushes our cash flows out into the future, which lowers the yield that we'll realize on the loans.

John Rowan

Okay. All right. Thank you.

Kenneth Booth

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

John Rowan

But actually, let me ask you another question. So if people aren't 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?

Jay Martin

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, but I think the factors you mentioned are contributing factors.

John Rowan

All right. Thank you.

Operator

John Hecht, Jefferies.

John Hecht

Morning guys apologize for the technical issue earlier. I just kind of follow on questions for both of the preceding questions. Is -- I know this cycle is unique but in historical cycles where they're -- your capital was scarce and maybe there was disruption in the environment, those tend 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 in an 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?

Jay Martin

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 is designed to produce acceptable returns in aggregate even if loan performance is worse than forecasted. So we'll continue to take that approach as we move forward.

John Hecht

Okay, thanks.

Operator

Robert Wildhack, Autonomous Research.

Robert Wildhack

Morning guys. Question on the '23 and '24 vintages 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 4 percentage points and 6 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?

Jay Martin

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 had started to see some underperformance on the '21 to '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 are performing better. So based on those two factors, we believe that the '23 business and the '24 business will perform better than the '22 business, but would also point out, especially the '24 business, it's not very seasoned at this point.

Kenneth Booth

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

Robert Wildhack

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

Kenneth Booth

The hurricanes impacted mainly, Florida and North Carolina, those two states are about [1.2% and 1.5%] of our portfolio. But obviously, the hurricanes didn't impact the entire state. So overall, they're really not that material impact to our portfolio.
That said they've been incredibly impactful for the people in the direct path. So consistent with our approach for many years and we're working to get those impacted by the hurricanes and ways to help them get back on their feet.

Robert Wildhack

Okay. 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?

Kenneth Booth

I mean, we've got wide variants of economic profit. Obviously 2019, was buoyed by stimulus payments and it over collected. I don't really want to get into the details of our kind of profitability by vintage but, I guess what I would say is 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 vintages.

Robert Wildhack

Okay. Thank you.

Operator

(Operator Instructions)
Ryan Shelley, Bank of America.

Ryan Shelley

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.

Kenneth Booth

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

Ryan Shelley

Got it. And then just one more quickly if I could. So you have a on maturity and March 26, but it's callable par now. How should investors think about your thought process around addressing that? Thanks.

Jay Martin

Right. Yeah, we're watching market conditions there very closely. Two good facts with that bond tranche, first, we have plenty of time it doesn't mature until March 2026, so 1.5 year 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 a 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.

Ryan Shelley

Understood. Thank you.

Operator

John Rowan, Janney Montgomery Scott.

John Rowan

Hey guys, just one follow up. The 2022 vintage is now sitting at a 13.2% spread versus an initial of 20.1%. Obviously, it's a relatively big decline. But how do we think about, where the level of economic profit doesn't become justifiable, right?
I mean, 13.2% you spread if that's a proxy for the internal rate of return to that pool. I mean or do we just look at that number to go down to the to your funding costs or where does that number become uneconomical to you?

Kenneth Booth

I mean, it depends on which program you're talking about. So on the purchase program a 1% decline in the forecasted collection rate, you tax effect that and you have to account for timing but that ends up driving a reduction in our return. The portfolio program is a little bit more complicated to think about.
Because the shortfall of collections is shared on a 80-20 basis with the deal up to a certain point. So the portfolio program insulates us from variations 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 that is the portfolio program.

John Rowan

Okay. All right. Thank you.

Operator

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

Jay Martin

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 investor relations mailbox at ir.creditacceptance.com. We look forward to talking to you again next quarter. Thank you.

Operator

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