Thanks, everybody, for joining us. I have a quick disclosure to read. For important disclosures, please see Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. The taking of photographs and use of recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. Okay, with that out of the way, we are excited to have Doug Timmerman, President of Dealer Financial Services at Ally, join our conference this morning. Doug, thanks so much for joining us. Good morning. Thanks for the opportunity. Appreciate the invite. Thank you, Betsy. Appreciate it. Let's kick off with a strategy question. You know, Ally has deep roots, clearly in the auto industry, which you're representing here today. There we go. You've transformed from a captive to a more diversified finance company, consumer finance company. Could you just briefly talk about the strategic evolution that's been going on over the past five, seven years and priorities for the future? Sure. So I guess, as I kind of think about it, I've been in the role for, I guess it's been about five and a half years now. You know, during that time, we have changed up our priorities a little bit. It's been a focus on kind of getting back to the basics. As we think about our priorities, it's been a focus on the core business, focus on where we're confident and, where we've proven that we can win in the marketplace. It's also been a focus on how do we better drive accretive returns. You know, some examples of that, we've had a heavier lean towards the consumer business, which obviously has, you know, greater returns than our commercial business. That's not to say the commercial business isn't important to us, and it's like we like to say, we no longer do commercial for the simple sake of commercial business. We want our commercial relationships to enable our consumer relationships. That has really helped with kind of driving the mix towards more consumer business. Given the success that we've had in driving additional application flow, which obviously creates our origination opportunity, we've also been able to concentrate the segments of our consumer business on the balance sheet for those segments that have the very best risk-adjusted returns. As you think about, you know, how do we drive accretive returns, it's also been a focus on those businesses that have higher returns, which includes our insurance business, includes our SmartAuction business. Another really bright spot, more of an initiative, but our pass-through activities. A lot of people probably don't understand that or don't know what that is. But essentially, what we do is those applications that don't fit our risk appetite, we pass on to other lenders. If those deals are consummated, we get a fee for those deals that are consummated. We also provide a value to the dealer in helping them sell another car or truck. For perspective, lifetime economics on that initiative and by itself, for 2023, will be about $60 million. Following through with the priorities, it's also been a focus on the blocking and tackling of the business and how do we optimize the blocking and tackling associated with the business. Significant investment in data and analytics relative to the front end. Think consumer underwriting, think pricing, and then also significant investments in the digital aspects of how we connect with consumers. Think about the collection side of our business. For perspective, five years ago, 95% of our collection activity was via telephone, and today we're very well diversified across text, email, push notification, and self-service. What that allows us to do is connect with the consumer in a way they're more comfortable in connecting with us, and in turn, allows us to be better positioned when they're in a time of stress, to be able to bridge them to a better place. We think that's had a lot of impact relative to, you know, our flow rates, flow to worse and flow to loss. Lastly, relative to priorities, it's always a view and a focus on how do we participate in the evolution of the industry. Again, a very simple, you know, approach, leveraging our strengths, but it's simply partnering well with those that are leading the evolution of the industry. We feel very good about our positioning in that respect. Well, there'll be a lot to unpack. There you go. as we go through the next half hour here. I know we're gonna be speaking specifically around, SmartAuction and insurance in a little bit. Yep. Maybe before we get into those details, you could give us a bit of a view as to what's happening here in the quarter. We're about two-thirds of the way into the quarter, is it possible to comment on any trends you're seeing, how the quarter is shaping up? Sure, I can give you some high-level perspective. Obviously, we'll give you more detail as we get into our earnings release and call. You know, I think from the quarter perspective, as we indicated, we're continuing to track towards origination flow in the low $40 billion range. Second quarter will be a bit stronger than what we saw in the first quarter. Relative to originated yield, we'll be north of 10%. We won't be quite as high as we were in the first quarter. Some of that just, you know, seasonal change, first quarter, second quarter. Some of it is us being more opportunistic in the super prime segment. Because of the change in the competitive environment, we're seeing probably some of the very best risk-adjusted returns in that super prime segment. We've kind of leaned into that segment. The change in our origination yield, although down, is really just a function of mix. Relative to credit, kind of a similar story that we talked about in the first quarter. I think everyone probably heard us, you know, talk about the fact that in the first quarter, we didn't see delinquencies come down as much as you normally would during tax refund season. They came down, but not to the same degree. As we indicated on the call, we'd be closely watching April and May and kind of seeing what that trend looked like going forward. I think how I would describe that, it was kind of shallow down in the first quarter, but in April and May, we're kind of seeing it shallow up in April and May, so kind of net effect there. As I indicated, flow rates continue to be, you know, close to historic lows, so we feel very good in that regard. Obviously, delinquencies, you know, are higher, you know, despite the fact that they've come up from that, you know, first quarter base, which is a seasonal change, delinquencies are higher, so our frequency is up a bit, but that's been, you know, offset with lower severity, of course, the strength of the used car market. More broadly, you know, from a deposit, you know, perspective, deposits should end the quarter, essentially right on top of where they started, so. In terms of deposit rate? The amount of deposits. Balances. Balances. Oh, okay. Yeah. Okay. On an end-of-period basis, you're basically flat. Flat. Okay ... to, yeah, flat to end of first quarter, right. Got it. All right. Okay, let's unpack that statement a little bit. ... as we go through. Sure, yep. You know, the first question is just around top line on pricing and pricing trends. Yeah. As you indicated, you know, 1Q yields were around 11%, you know, coming down a little bit now with the mix shift like you're indicating. Mm-hmm. The question we get from folks is, how can you have still taken share even with this yield increase that you've had? Right. Just give us a sense as to, you know, where you think that origination volume can go with this higher level of interest rate. Got it. Yeah. It may be a good way just to, you know, provide a little bit of color, you know, more tactical relative to the operational side of the business. But another change that we made, you know, five years ago is how we go to market relative to our consumer business. How we used to do it, how everyone used to do it, how most everyone still does it today, was trying to describe to the dealer, the F&I manager, what is an Ally deal? What does it look like? The good thing, given our evolution of our business and the fact that we've automated a lot more of our decision-making. For perspective, five years ago, 40% of our approvals were automated. Today, we're between 70% and 75%. We changed how we go to market and how we engage the dealer. Today, we simply tell the dealer, "Send us all of your applications." We don't want to miss out on an opportunity to conquest the business. We don't want to miss out on an opportunity to help you sell another car or truck. You know, we want to, you know, look at every single application. As you can imagine, that's resonated, you know, very well with the dealer. It's also provided substantial benefit for us. As I indicated, our application flow has grown significantly. The origination volume associated with that application volume, significantly bigger than what we have capacity on our balance sheet. It also gives us a great view of what's happening across all segments of the business. Kind of a case in point of where I mentioned that we've been leaning in more in the super prime space. The fact we're seeing that application flow, we see that opportunity, and because we're getting the application flow, we can kind of jump right on it. It also gives us a lot of optionality. It gives us, you know, selectivity. It's allowed us to concentrate in those segments that have the very best risk-adjusted returns, and also allows us to feed that pass-through activity that I mentioned. Where we have a, I'd say, a very moderate appetite for non-prime business. We essentially don't play in the deep subprime business, but because we get that application flow, we can pass it on to others and get the economics. Punchline is the evolution of how we've gone to market, and the fact that we've been able to increase our application flow, has allowed us to price above the market to a much greater degree. If we priced on top of the market, we would be doing a lot more origination flow than we have capacity on our balance sheets. If you kind of think about what that means, normally in a rising rate environment, our beta might be 50% or 60%. We're north of 90%. That's kind of case in point of how that tactical change has allowed us to significantly increase our returns. If you think about that in reverse, in a declining rate environment, we'll still have those same advantages. To put all that together for perspective, you might remember the 3rd quarter of last year, we mentioned marginal returns on our consumer business were 37% on a base case and north of 20% on a stress basis. A lot of stress. Fifty percent higher credit losses, 100 basis points higher cost of funds. Much more stress than we anticipate, but for perspective. Now, if you go forward to where we stand today, this gives you a pretty good perspective of what's happened to competition since 3rd quarter last year. Our base case marginal return would be north of 50%, and our stress basis would be in the high 30% range. Anyhow, it gives you a little bit of perspective of, you know, how things have changed, how our tactical moves have allowed us to significantly improve our returns. Obviously, that speaks to why we're very bullish when we think the returns of our 2024, 2025 business, and also gives you a little bit of perspective what's happened in the competitive front, just from the third quarter of last year. Your point on your go-to-market approach with the dealers, saying: "Hey, look, give us all your flow." Would you say that you're achieving that from vast majority? There's still a lot of opportunity. I mean, I think the exciting thing for me is we've made a lot of progress. I attribute a lot of that progress to having the right priorities and, of course, the execution of a kick-ass team. There's still a lot of opportunity to be better in that regard. We do business with 22,000 dealers from an auto finance perspective. Again, it's not a commitment on the origination flow; it's a commitment on the application flow. As an F&I manager is going through the process, it's simply there's a button that says, "Click all," on certain lenders. We're the lender that gets that opportunity. Okay. How far into that 22,000 dealer are you know, penetrated with that option? I would say our engagement probably is, you know, less than 40%. A lot of opportunity to to that side. Great. Okay, thank you. Wanted to talk a little bit about what SmartAuction. You mentioned earlier that that's been a driver of some of the you know, upside that you've been seeing recently. Yeah. Could you give us a sense as to the trends in that business, as well as some of the other products, that that enables for you? Sure. Our SmartAuction business, I would probably describe as, has been almost on fire since going through the pandemic. As you probably know, if you follow the auction industry, auction industry has been challenged a lot during the pandemic, which is pretty intuitive. If you look at, you know, transactions during the pandemic, call it 2019- 2022, transactions in the industry were probably down 25%. Our net revenue on SmartAuction, obviously a digital auction, was up 40%, 2019- 2022. Bucking the trend and bucking the trend in a big way. Dealer engagement, obviously, given the pandemic, increased a lot. But the good news, we're seeing stick rates on that dealer engagement to, you know, stay in place. We were also very successful to gain big commitments from large consignors that support the supply side of the auction formula. Think Enterprise Rent-A-Car as one of those. Significant increase in demand relative to dealer engagement, and then supply as it relates to vehicles available on the site. As we look forward, as things kind of normalize, particularly in the rent-a-car segment of the business, we think our net revenue over the next three years, 2023, 2024, and 2025, will grow 60%. That's absent additional conquest relative to other large consignors. We're really excited about our digital auction, SmartAuction. Of course, by seeing all those transactions and not just, you know, how those deals actually transact, the prices, but we see all the bid-ask data as well. It gives you a lot of perspective relative to kind of where the used market is and, you know, where used vehicle values are going at the same time. It's a unique advantage relative to insight as to what's happening to the used pricing, segment, so. How are you using that for underwriting? Maybe give us a sense of that. Yeah, so it's a... I'll say it's kind of behind the curtain, but it gives us perspective relative to, you know, what we're seeing relative to used vehicle trends. It gives us some additional insights relative to where we think used vehicle values are. Of course, you know, part of our formula relative to pricing gets to be is the forward trend and what we think relative to used vehicle valuations. When I'm thinking about the auto originations that you indicated for, you know, this period, $40 billion or so, is that right? Low $40 billion range. Okay, versus 46 the last year. Hearing you up here, sounds like maybe there's some upside to that. Is that fair or no? Yeah, I think that's fair. I mean, I think if you think about the, you know, kind of those stress cases that I mentioned, obviously, we feel very good relative to our positioning and pricing and the segments of business we're doing today relative to, you know, credit stress going forward. Yeah, there's obviously uncertainty on the regulatory front relative to capital and liquidity. I think if there's one thing that's probably holding us back, that would be, you know, that piece. As that becomes, you know, that uncertainty goes away, is there opportunity for us to do more? Absolutely. We talked a bit about competition already. You're leaning in. It feels to us and investors like others are leaning out. Maybe you could give us a sense as to where the competition is, you know, most advantageous for you. Mm-hmm. Where do you still see a lot of activity? Yeah, and I would say that the competitive environment is probably being driven by that same uncertainty on the regulatory front. There's certainly some that's a function of credit. I think a lot of that credit, you know, change probably happened, you know, last year. I think the changes relative to the competitive environment today is more on the regulatory front. As I mentioned, you know, in the super prime space, you know, that's a segment that we don't normally play a big position in, but we've leaned in because the pricing has been advantageous, and again, some of the very best risk-adjusted returns. The regionals stepping out of that business, they normally play in that segment. We've seen, credit unions have finally priced to market, as, you know, they were priced under market for a while, which really caused, you know, kind of challenge to get the right returns on that segment of the business. Yeah, there's also, you know, a lot of, you know, institutions that, you know, have called it, try to put a governor on their flow. How they oftentimes do that, what we say it internally, they kind of just hit it with a blunt instrument. It's not real strategic, but they'll simply say, "We don't want to originate any credit, you know, under a certain credit bureau score or above a certain LTV." Of course, you know, in those scenarios, it gives us an opportunity to kind of play in those segments where it makes sense. Those are kind of the dynamics that are happening. Again, relative to the competitive change, if you think about, again, those marginal returns in third quarter last year to today, to where we're at today, it gives you a good perspective of how competition has changed during that timeframe. We've been watching and trying to model the auto industry for quite some time. I don't think I've ever heard anybody say that super prime had the highest risk-adjusted returns. What do you think is happening this, like, right now, today? Yeah that's driving? I would say the highest risk returns for that segment of business. Okay, got it. Obviously, not higher than other segments. We still like the belly of the credit curve, if you will, but better risk-adjusted returns that we've seen in that segment for a significant amount of time. Sorry for the confusion there. Got it. Yeah. That's just a function of where the rates are? Function of where the pricing's going. Okay. The fact that some have made those, you know, adjustments from a credit perspective, that allows us to price higher in those segments. Got it. Now, you've also been tightening credit, right? Tightening credit standards over the past, you know, year or so. Can you just give us a sense as to how your newer vintages, you know, the front book is trending? Yeah. So, we're continuously fine-tuning. I mean, that's to some degree, that's a function of identifying segments that we don't want on the balance sheet. To some degree, that's a function of pricing out to those segments that we think that we want additional price. But I think if you just kind of think about again, those marginal returns and where we stand to today on what we're originating, it gives you a very good perspective relative to how the overall book is looking. But the front book obviously, was the segment that, you know, thought most stressed. We continue to see that, you know, perform, you know, not as well as some of the other segments, but still, when we look at the marginal returns on those segments, they're good from a base case, they're good from a stress basis, they're just not as good as other segments of our business. Okay. just, you know, full year guide for net charge-offs in the retail auto is what? 1.6%-1.8%. Is any sense of how you're tracking there? Feel very comfortable with the guidance. Well, we feel very good about the second quarter will come right in line with, you know, what the expectations are that we, you know, passed on. Yeah. Used car prices impacting that at all? Yeah, you're gonna have some impact relative to used car prices. Obviously, as I mentioned, frequency has been up. That's been offset, by, you know, better, lower severity, higher used vehicle values. Yeah. Okay. While we're on the topic of credit, any updates on Carvana? I just wanted to understand how that book is performing for you. We like the flow business a lot, that's a general statement. Obviously, we have other flow partners. Carvana is obviously the largest. Over time, you'll see that we'll have more flow partnerships. You know, it's a unique opportunity to... I'll say, the more sophisticated- Mm -lenders. Obviously, it's a defined buy box. It's all coming from one originator, so it gives you more clarity relative to performance. You know, we certainly like our relationship relative to the flow with Carvana, and of course, it's good to see them having, you know, good progress relative to their operation side of their business as well. Just lastly, on credit, we've got the student loan moratorium ending soon. Any thoughts on how that impacts you? Of our total book, you know, of those students that are not currently in school, I think it represents about 17% of our, you know, total book. It's heavily skewed towards what we would consider to be some of our better segments of business. But that's kind of where we stand relative to student loan exposure. Okay. turning to lease. Mm-hmm. Just wanted to get your thoughts on this. We've had used car vehicles, you know, prices come down obviously, but lease gains have held up really nicely, right? Could you just give us a sense of the puts and takes there, and where we should think about lease yields trending? Yeah. Lease yields will probably be right in that 7% number. Obviously, this year, used values have increased, we've seen the associated, you know, better lease gains associated with, you know, those higher used vehicle values. I think the important point is used vehicle values as they start to decline, there'll be fewer vehicles that are bought out by the lessee and by the dealer. More will come to us, more of the economics will come to us. The average gains will be smaller, but we'll call it, make it up on volume, if you will, more coming to us. Got it. Yeah, we saw some of that last quarter, right? That's right. Yeah. Yeah. What about floor plan? How are the dynamics there? I mean, we went through that pandemic period... Yeah when floor plans, you know, fell away a bit, but now? Sure. Yeah, I think, again, we've had a philosophical change relative to, you know, the commercial lending side of our business. So that, you know, what we'll put downward pressure relative to our commercial outstanding, and that's been by design to, you know, allocate a greater mix to our consumer business. Again, it's important to us, but we want those commercial relationships to enable our consumer business. So some of those relationships have, you know, call it fallen off the balance sheet. Today, you know, we have, about $20 billion in floor plan outstandings. You know, for perspective, we see those balances growing at a pretty, kind of steady pace. You know, we'll probably be, call it 10% higher at the end of the year, maybe another 10% higher as we get to the end of 2024. We won't get back to the days of, you know, the past relative to the amount of outstandings, and again, that's by design. That's, that's part of how we're driving, better, returns on the overall business. Okay, great. Just talk a little bit about insurance. Sure. You're responsible for that line as well. It's been a steady grower. Profitability has been going up. Can you just give us a sense as to trends, updates within that segment? Sure. maybe of interest, another, you know, kind of tactical perspective relative to the business. And so coming out of the pandemic, you know, we really kind of challenged ourselves to kind of think different as it relates to our insurance business. We have a new leader, Daniel Eller, which many of you guys probably know Daniel, from his days here. But, you know, the thought is, you know, pretty simple in the fact that we have over 22,000 auto finance relationships. Less than 10% of those use us for our F&I business. And so, you know, the thought is we're gonna change up how we go to market. Simply, the auto finance team is now responsible for generating leads relative to prospective insurance customers across our auto finance book. How does that happen? It's about a meeting with the dealer principal, talking about their current F&I provider. What does that provider do relative to training, compliance, and helping the dealer optimize their F&I results? Where you see opportunity where, you know, that provider is not doing their job and the dealer isn't happy with their provider, or maybe they're not happy with the results, or maybe they shouldn't be happy with the results, then that gives us an opportunity to pitch us as a better provider. Last year, our conquest activity, very strong. First quarter this year, our very best on record, at least over the last five years since I ran the insurance business, by the way. Very importantly, not as our conquest business strong, but the case studies associated with those conquests relative to us delivering on a value proposition has come in very well. Kind of building those case studies, which obviously will give us more momentum to conquest more. Again, kind of a simple approach, leveraging our strengths, changing things up, and figuring out how we can, you know, operate the business at a higher level. Kind of case in point of the change that we made and why we're very bullish that the insurance business can also be better. Okay. Just pause and see if there's any questions in the room, and if not, I have three more to go through. All right, let us know if you have a question, just raise your hand. Wanted to turn to capital, right? We've talked a bit about capital allocation already and how you've been mix shifting the portfolio. Can you just give us a sense as to how you're thinking about the capacity for growth in your sleeve, and is there anything that, you're thinking about with regard to, you know, allocating more capital? Right. Yeah. There seems to be a lot of opportunities-, and capital appears like it's the-. Yeah ... governor on growth Right. Yeah ... tell me if I'm wrong there. Yes. Well, that's probably more of a question for my boss. I can tell you as running the auto business, and I'll go back to those marginal returns, again, over 50% on a base case, a high 30%, from a stress basis, you know, feel really good about what we're originating today, and more would be better from my perspective, but obviously there's a balance there. Okay. Yeah. Yeah. I believe Ally paused the buyback right now anyway, so I guess. That's right. you're getting as much as you can. That's right. Yeah. Yeah. All right. A question on technology. There's been quite a bit of, you know, discussion about long-term investments in technology, overall tech evolution, and I know you've been doing a lot on the technology investment side. Can you give us a sense as to how you think those investments have helped your business and what's left to do? Sure. Yeah, well, again, there's always opportunity to be better. I think, you know, we have kind of a unique approach in the auto business, that we're highly technology-driven, highly digital, but also very high service-oriented. It's kind of the combination of two. I think the areas that I would point to is, you know, first, as it relates to our SmartAuction business, making significant investments to improve the user experience has helped dealer engagement significantly. Being willing to kind of adjust, you know, how SmartAuction works, you know, kind of look and feel, has also been a big advantage for us in conquesting those large consignor accounts. Again, you know, call it the Enterprise Rent-A-Car of the world. Significant investments, again, relative to data and analytics, which also is not just the underwriting side, but also the pricing side of the business, which, of course, is technology-driven. Then again, what I mentioned relative to, you know, how we digitally outreach to our collection customers to help us, you know, position in a way that we can better help them in a time of stress. All those things, It's always continuous fine-tunement. It's always about how do you make it incrementally better? As you can probably appreciate, because of our size and scale, just a little bit of fine-tunement can have, you know, significant impact to the bottom line, so. All that technology investment clearly has enabled you to get to the point where you're looking for total flow from dealers and increasing that? Absolutely. And- Yeah, without that investment, for example, five years ago, I think I mentioned that, you know, 40% of our approvals were automated. Today, we're 70%-75%. All those things are driven from a technology perspective. Yeah. What percentage of total demand for auto credit would you say you see today? Well, that would be a hard one. It's very fragmented. Mm. I would just say that it's still a small piece of the pie, and there's still a lot of opportunity. Even given that it's a small piece of the pie, you know, we have opportunity that is significantly bigger than today's balance sheet. Okay. Just wrap-up question for me, unless there's any questions in the room. You know, the auto asset class has proven pretty resilient here, I guess, over different economic cycles, right? Yeah. We've seen actually relatively modest increases. The velocity has not been as fast as we've seen in some other asset classes, especially in the consumer. Obviously, it's your largest asset class. You know, at the same time, higher used car prices and interest rates have created some affordability issues for consumers. Wanted to understand how you're thinking about access to credit, access to financing, and the outlook for auto financing here as we go through the next couple of years, especially if we're in a higher for longer environment. Yeah. So, you know, I guess from our perspective, you know, we're very bullish on the business, which ties back to those consumer returns that I mentioned, the success that we've had relative to rebalancing the balance sheet, consumer to commercial, and concentrating our consumer business. We're also very excited about all the things that we've done relative to SmartAuction and the insurance side of the business. The industry as a whole, what we think is, you know, very, very healthy. There's still a lot of pent-up demand. You know, the right product is selling very quickly. Any build up in inventory gets to be, you know, probably those products that might be, you know, maybe priced a little bit high, maybe heavy content. They sell, but it takes a little bit longer. You know, if you were to ask dealers how they feel about the business, we just got out of a dealer advisory board a couple of weeks ago. My dealer advisory board, very bullish across that, you know, dealer body. With interest rates, you know, were lower, but despite higher interest rates, that they're doing very well. They feel very good about consumer demand, that they feel really good about used car prices. When we talk about, you know, our view on used vehicle prices, which, you know, coming into the year, we thought used vehicle values were gonna come down by 13%. Subsequently, if you look at our index, used values have actually increased 8%, you know, this year. We've revised our forecast that previously it was down 13% for the full year. We've revised it to the 8%. That would mean that used vehicle values would have to go down 15% from today to the end of the year. That seems like a lot. It seems like a significant amount. We would probably agree that it feels a little bit conservative, you know, even in that scenario, as we kind of think about things, you know, is there potential risk for delinquencies to go a bit higher? You know, there's always that potential. There's a possibility that flow rates break down a bit. There's always that potential. As we think about used car prices, you know, we kind of think about it's always when you have risk and opportunities, it's always good to have balance between your risk and opportunities, and we view kind of the used piece of that segment to be our opportunity relative to how things might trend out, so. Great. Doug, thanks so much for your time this morning. Appreciate it. Thank you. Very good.