Douglas Busk; Chief Treasury Officer; Credit Acceptance Corp
John Rowan; Analyst; Janney Montgomery Scott LLC
Rob Wildhack; Analyst; Autonomous Research
Ryan Kelly; Analyst; Bank of America
Presentation
Operator
Good day, everyone, and welcome to the Credit Acceptance Corporation second quarter 2024 earnings call. Today's call is being recorded and webcast and transcript of today's earning call will be made available on Credit Acceptance website. At this time, I'd like to turn the call over to Credit Acceptance and it's Chief Financial Officer. Jay Martin?
Jay Martin
Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation second 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 SEC's Regulation G, please refer to the financial results section of our news release, which provides tables showing how non-GAAP measures reconcile to GAAP measures. At this time, I will turn the call over to our Chief Executive Officer, Ken Booth, to discuss our second quarter results.
Kenneth Booth
Thanks, Jay. We had a mixed quarter. It related to collections and originations two key drivers of our business. Our 2022 vintages continued to underperform our expectations that our 2023 vintage began to slip as well. Demanded additional $147 million adjustment to forecasted net cash flows on top of our normal forecast model for just our loans originated in 2022, 2023 in the first half of 2024. What we believe the ultimate collection rate will be based on trending data over the last several years. Historically, our models have been very good at predicting low performance in aggregate but our model work better and less volatile times. The pandemic has ripple effects. Pretty volatile conditions, federal stimulus, enhanced unemployment benefits and supply chain disruptions led to vehicle shortages, inflation, et cetera, all of which impacted competitive conditions. We have had larger than average forecast misses both high and low during this volatile period. So because we understand forecasting collection rates is challenging, our business model is designed to produce acceptable returns, even if loan performance is less than forecast. Even with our reduction in forecasted collections this quarter, we believe we will continue to produce substantial economic profit per share in the future. 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 on the industry. We price to maximize economic profit over the long term, and we seek to best position the company have access to capital becomes Limited. Ultimately we are happy with the discipline to maintain underwriting standards and easy money kinds of 2021 and especially 2022. As well, our market share was lower during those years, we believe it has put us in a better position to take advantage of more favorable market conditions today. During the quarter, we experienced strong growth and had our highest Q2 unit and dollar volume ever growing our loan unit and dollar volume by 20.9% and 16.3%, respectively. Our loan portfolio is now a new record high at $8.6 billion on an adjusted basis. Our market share in our core segments continues to increase a 6.6% as of May 31, 2024. Beyond these two key drivers, we continued making progress during the quarter towards our mission of creating intrinsic value and positively changing lives are five key constituents dealers, consumers team members, investors, and the communities we operate. We do this by providing a valuable product that enables dealers to sell to consumers regardless of their credit history. Dealers make incremental sales for the roughly 55% of adults with other than prime scrap. So these adults that enables them to obtain a vehicle to get to their jobs, take their kids to school, et cetera. But also gives them the opportunity to improve or build a credit. During the quarter, we originated 100,057 contracts for our dealers and consumers. We collected $1.3 billion overall and paid $84 million in portfolio profit through portfolio profit Express to our viewers. We added 1,080 new dealer to the quarter and now in our largest number of active dealers ever per second quarter with 10,736 active dealers. From an initiative perspective, we continue to train new go-to-market approaches using a test-and-learn approach. We believe some of these have been successful and have contributed to our growth. We also continued investing in our technology team. We have ramped up personnel and are focusing on modernizing how our team performed work for the goal of increasing the speed at which we enhanced our product for our viewers and consumers. During the quarter, we received three awards from Fortune US News and the Best Practices Institute recognized as a great place to work, continue to focus on making our amazing workplace even better. Who supported team members and making a difference and will make the difference to them and connect all of their efforts that contributed organizations such as Make-A-Wish Foundation, St. Jude Children's Research Hospital, the Shades of Pink Foundation and Versiti Blood Center of Michigan, among others. Now Douglas our Chief Treasury Officer, Jay, and I will take your questions.
Question and Answer Session
Operator
(Operator Instructions) Moshe Orenbuch, TD Cowen.
Moshe Orenbuch
Great, thanks. Is there any way to kind of 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?
Douglas Busk
Well, the first thing is we now believe that the 2022 originations are seasoned enough for us, enhance our estimate over what we provided previously. What we've done simplistically is we have assumed that the '23 and '24 originations are going to exhibit similar trends in terms of variance from the initial forecast of the slope of the collection curve, which we provided out over time. We're assuming that those percentage changes is going to be similar to what we've seen in 2022. Both trends that we're seeing in '23 and '24 are there, but they're less severe than the '22 loans. And since the fourth quarter business are also performing better from an absolute perspective, the adjustments in percentage terms is less significant than the mess we're going to have on the '22 business. So it was really just assuming that the '23 and '24 originations will behave similarly on a percentage basis to what we've seen on '22.
Moshe Orenbuch
Again, one of the things that's unique about the way you guys kind of report your adjusted earnings, is you take that hit into your provision this quarter, but you spread out the impact on future periods, you had a 19.6% yield adjusted revenue yield. Like can you give us some way of thinking about how much of this is going to flow through and over what period and how to think about the impact on that 19.6%?
Douglas Busk
Well, I think that -- just the yield on the loan asset was 17.7%, of course. I think revenue as a percent of average capital was 19.6%. So two slightly different things, but they'll behave similarly. All else equal your flow performance is exactly as expected. We would expect to yield or revenue, if you want to look at it as a percent of average capital to decline in Q3. The magnitude of the cost decline will obviously be dependent on the yield on new originations. And obviously whether our own performance is better or worse than expected. But all else equal, we would expect revenue for the yield on the portfolio to decline.
Moshe Orenbuch
And last one for me, and honestly I'm struggling as to how to phrase this. But given that this is the second of these in basically a year, I guess, what -- why is that a good thing that you're originating more loans like in other words, we shouldn't be doing the opposite. Shouldn't you be pulling back and saying maybe we're doing something wrong here?
Douglas Busk
So it's a fair question on, as Ken said in his intro, we still believe that these all are producing returns in excess of our weighted average cost of capital. That's generally how we return to neutral to see from others in the industry. So we think it's adding shareholder value or to continue to originate the business that we're originating. And as I said, we feel better about the '23 and '24 loans that we did about the '22 loans, which were obviously very disappointing to us.
Operator
(Operator Instructions) John Rowan, Janney Montgomery Scott.
John Rowan
Most of the question, but a little differently. The implied spreads are still pretty high. The initial implied spreads for 2024 are still high. Historically speaking on what gives you confidence that those are the right numbers, given the magnitude of the reductions that you're putting into the prior forecast revisions. And I guess just trying to figure out there's more risk, continuing to write portfolio down if we're aggressive on some of the assumptions going in that are again still writing to relatively high spreads? Historically speaking.
Douglas Busk
I mean, we were, you know, as I said, we're basing our current estimate for '23 and '24 based on the absolute performance to date of those vintages. And then we're applying a similar degradation in the collection rate. Overtime to what we've seen on '22. Now we're using history as our guide to earn, forecasting consumer loans, especially in recent years, has been challenging. And so we're putting our best number on it, but is there a chance we could be wrong? There's always a chance.
John Rowan
Okay. And then just for modelling purposes, obviously, with the GAAP loss in the quarter, I assume the share count that you reported was the basic share count. Gives you me an idea of what the real Diluted share count would be or how many diluted shares you have. So going forward, we will get that in the model.
Douglas Busk
Yeah, I think if you look at our 10-Q and earnings per share, footnote, it will show you how many shares were anti-dilutive for the quarter. That is the case. So it was a loss. We did stick with the basic shares, particularly quick. Look here to see what was excluded is anti-dilutive. It's like it was around for the quarter 217,000 shares.
Operator
(Operator Instructions) Rob Wildhack, Autonomous Research.
Rob Wildhack
One more on the '23 vintage. Some other lenders have talked about the early part of that year, maybe in the first quarter of 2023, loans originated then is driving underperformance for that vintage. Would you echo that? Or is the underperformance that you're seeing in 2023 pretty broad based across originations throughout the year?
Douglas Busk
No, I would say that that's a fair comment. We see a situation where the early '21 loans performed better than the last half of '21. The first part of ;22 was kind of a file for well performance perspective on things got somewhat better at the end of '22, got better the first part of '23, but the underperformance on the performance of the second half of '23 loans was better than the first half for sure. And that trend has continued into 2024 So long-winded answer, I would agree with your commentary.
Rob Wildhack
Okay, thanks. And then just on the unit growth, I think April was slower than the quarter was in aggregate, which would imply a step-up in growth in May and June. Is there anything specific that was driving the acceleration in May and June? And then to ask the question kind of forward looking July, looks pretty strong at plus-28%. Anything to call out there's July benefiting from an easy compare or anything like that? Or do you think you can continue to grow at that pace going forward?
Kenneth Booth
It is always difficult, but it's there's a lot of macro uncertainties, the confirmed, the competitive environment, inflation, interest rates, things like that. They are right that it improved kind of throughout the quarter and into July, whether that continues or not, it's really tough to say we will have tougher comparable going forward. So that is said, we have made improvements to our product and we're hoping that Telenor difference as well. And we believe that is a positive impact. So you look at buying for dealer itself. So that's a good sign for us. And that means our products probably better and it means better margins. And hopefully that continues.
Douglas Busk
I think the other point I would add to what Ken said is it's hard to draw any conclusion from looking at one month at a time. When if I look at the growth rates for the quarter, April was 17%, May was 26%, June was 20%, and then July is back up running at 27%. So when you break it down into smaller units, you obviously get more variability?
Operator
(Operator Instructions) Ryan Kelly, Bank of America.
Ryan Kelly
Hey, guys. Quick question here. So along with the earnings you filed amendments to both the revolving credit agreement and one of the warehouse agreements around the definition of consolidated net income. Can you just explain the rationale there and some yeah, is like what that definition changes all about? Thanks.
Douglas Busk
I mean, as we've said for years in our press releases, we think the best way to evaluate our financial performance is on the basis of level yield accounting based on forecasted cash flows. So we're looking at the forecasted amount and timing of the cash flows and discounting it back. And that gives you a yield and we're using that yield for revenue recognition. And then, every month you re-forecast the levels of -- your forecast goes up or down. You adjust your forecast, respectively. The adjustments that we made to the definitions those credit facilities, basically starting with GAAP net income backed out of provision for credit losses and then applied floating yield adjustment and when you do that, you get to Level yield revenue recognition based on forecasted cash flows.
Operator
With no further questions in the queue, I would like to turn the conference back over to Mr. Martin for additional or closing remarks.
Jay Martin
We'd 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.