Credit Acceptance Corp (CACC) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the Credit Acceptance Corporation's first quarter 2010 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 Senior Vice President and Treasurer Doug Busk. Please begin.

Thank you, Sean. Good afternoon and welcome to the Credit Acceptance Corporation first quarter 2010 earnings call. As you read our news release posted on the Investor Relations section of our website at 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 adjusted financial results section of our news release, which provides tables showing how non-GAAP measures reconcile to GAAP measures.

This afternoon, Brett Roberts, our Chief Executive Officer, and I will provide some comments relating to our operational and financial results, as well as our liquidity position. After we've concluded our prepared remarks, we have set aside some time for questions. To assist us in answering your questions, we also have Ken Booth, our Chief Financial Officer with us today. At this time, I'd like to turn the call over to Brett.

Thank you, Doug, and thanks to everyone who has joined us this afternoon. In our earnings releases we report both GAAP and adjusted results. Internally we focus almost exclusively on adjusted results, as we believe the adjusted results more closely reflect our true economic performance.

The results I will refer to in the next few minutes are all on an adjusted basis. For the most recent period, we earned 35.5 million, compared to 24.7 million for the same period of 2009. Earnings per share were $1.12, a 41.8% increase over the $0.79 reported last year.

We think about results in terms of the amount of capital invested in the business and the return we earn on that capital. Average capital invested for the quarter was just over 1 billion, which is up 1.4% from the prior year's same period. Although we intend to grow the size of our business over time, growth was not the reason for our strong results during the quarter.

Instead our results improved because we improved the return on capital. For the quarter, our after-tax return on capital was 17%, compared to 12% for the same period of 2009. As we discussed in the release our return on capital improved as a result of higher yields in our loan portfolio, and to a lesser extent lower operating expenses.

The higher yields are result of both favorable pricing and strong loan performance. Our primary financial performance metric is economic profit. Economic profit is a function of three variables, the return on capital, the cost of capital, and the amount of capital invested.

Our incentive plans are based on growing economic profit. Growing economic profit requires us to either improve the spread between our return on capital and the cost of capital, or grow the amount of capital invested. Over the last nine years, we've been successful at both growing the amount of invested capital and improving the spread between our return and cost of capital.

As a result, economic and profit improved from a negative 5 million in 2001 to a positive 79 million in 2009, during the most recent period, economic profit was 23 million, a 54.7% increase over the 14.9 million reported in the same period of last year.

As I mentioned in our last conference call, if we are successful in growing economic profit in future periods, it is much more likely to come from increasing the size of our business, rather than from increasing our return on capital. The return on capital produced in the most recent period is at the high-end of our historical range and reflects a very favorable competitive environment that is not expected to continue.

In fact, in late 2009, and so far this year, we are seeing competition return to the market, as capital is now less constrained than it was during 2008, and much of 2009. In both the fourth quarter of 2009 and during the most recent quarter, we have made pricing changes that have reduced the return we are earning on new business in exchange for more volume.

The objective of these pricing changes is not to achieve a fixed growth target, but instead they're intended to maximize the amount of economic profit we generate on new originations. This requires us to appropriately balance unit volume and profitability per unit.

We are confident that the pricing changes we have made thus far have been consistent with this objective. Our ability to grow economic profit in the future will depend in large part on to what degree competition returns to the market. At this time, Doug will provide some additional comments on our operating and financial results, as well as on our liquidity position.

Thanks, Brett. The first thing I would like to discuss is consumer loan performance. Consumer loan performance is one of the most important variables that determine our financial results. Most important time to assess consumer loan performance is at the time of origination, since that is when we determine the amount of the advance to the dealer.

If we're able to accurately assess consumer loan performance at the time the loan is originated, we'll likely attain our target return in capital and produce acceptable financial results. Since assessing consumer loan performance at the time of origination with precision is difficult, we set advance rates so that even if loan performance is less than we expect, the loans that we originate are still highly likely to be profitable.

Overall, consumer loan performance for the three months ended March 31, 2010 was consistent with our forecast at December 31, 2009. Forecasted collection rates for loans originated in 2009 increased, while the forecasted collection rates declined slightly for loans originated during 2007 and 2008.

Moving to loan volume, the dollar and unit volume of consumer loan originations increased 21.6% and 11.2% respectively during the first quarter of 2010, as compared to the same period in 2009. These increases were due, primarily, to pricing changes implemented during the last four months of 2009 and the first quarter of 2010.

Moving to financial results, we recorded strong financial results for the first quarter of 2010. We reported consolidated GAAP net income of $32 million, or $1.01 per diluted share, compared to net income of $29 million, or $0.93 per diluted share for the same period in 2009.

As Brett mentioned, we also disclose adjusted financial results. We do so to help shareholders better understand our financial performance. Our adjusted results include several adjusted to our reported GAAP results. An explanation of each of these adjustments is contained in our earnings release.

On an adjusted basis, consolidated net income for the quarter was $35.5 million, or $1.12 per diluted share, compared to $24.7 million, or $0.79 per diluted share for the same period in 2009. The increases in both GAAP and adjusted net income for the quarter were due to an increase in the yield on more recent consumer loan originations and, to a lesser extent, a reduction in operating expenses.

Partially offsetting this was an increase in interest expense due to an increase in our pre-tax cost of debt, as a result of the $250 million senior notes offering completed on February 1st of this year, and the impact of fixed fees on lower average outstanding debt balances during 2010.

In addition, our GAAP results were negatively impacted by an increase in the provision for credit losses. The provision for credit losses increased to 6.4 million for the quarter ended March 31, 2010, from 164,000 for the same period a year ago.

Under GAAP, when forecasted future cash flows decline, relative to the cash flows expected at the time of a loan origination, a provision for credit losses is recorded immediately as a current-period expense, and a corresponding allowance for credit losses is established.

For purposes of calculating the allowance, dealer loans are grouped by dealer partner, and purchased loans are grouped by month of purchase. As a result, regardless of the overall performance of the portfolio of consumer loans, a provision can be required if any individual loan pool performs worse than expected.

During the most recent period, overall consumer loan performance was consistent with our expectations at the start of the period. However, a 6.4 million provision for credit losses was recorded, consisting of 3.4 million related to specific dealer loan pools, and 3 million related to certain purchased loan pools that experienced a decline in forecasting cash flows during the period.

The last topic I want to discuss today is our liquidity. As a result of a securitization completed in the fourth quarter of 2009, and the senior note offering that was completed in the first quarter of 2010, we are in a very strong liquidity position. We have two revolving credit facilities that we hope to renew in the near future.

If we are successful at renewing these facilities, we believe that we'll have the capital that we need to consistently grow our business, and will consider returning excess capital to shareholders as we have in the past. And now, I'd like to turn it back over to Brett.

Thanks, Doug. This concludes our prepared remarks for this afternoon. We would now like to welcome your questions.

Thank you, ladies and gentlemen. (Operator Instructions). One moment for the first question. (Operator Instructions). Our first question comes from Brett Johnson with Rocket Capital.

Hey, gentlemen. Can you hear me?

Your line's open.

All right. Hey, gentlemen, good quarter.

Thank you.

I had a couple housekeeping questions related to the P&L, and then a couple other more general items. In terms of expenses, can you comment on--I know you had some lower items in operating expenses. Can you comment on why that was such a large change from last quarter, or Q4?

I don't know that it was such a large change. I guess we've been sort of trending downward in terms of operating expenses. We look at that as a percentage of capital. For the first quarter, we were at 10.9%, last quarter 11.2%. The second quarter of '09 was 10.7%. So, we've kind of been in that range of around 11%. It's going to vary a little bit from period to period. And then what we'd like to see going forward is as we start to grow the amount of capital that we get some leverage into that number.

Okay. I guess I was looking specifically at your G&A line. Q4 it was 7.6 million, and it dropped down to 6.5. So, that's a normal kind of occurrence, then?

Yes. I mean, it's going to fluctuate from period to period. We could answer that on the investor website if you want to know what exactly was in the number for Q4, which looks like the outlier to me.

Okay, okay. That's helpful.

Our next question comes from William Matthews with Post Advisory.

Hey, guys. Could you just give us a little color around the disclosure you have regarding changes in consumer loan unit volume, and active dealers? The consumer loan volume from new dealer partners dropped a little bit. And I don't know if that's significant, but it dropped quite a bit down to 21%. Is that significant, or how should we look at that, if you calculate this attrition rate? What should we take away from that?

What we're doing there is we have a strategy to try to be more selective about the dealers we're enrolling the program. And the reason that we're doing that is we didn't like what we were seeing in terms of dealers and rolling in the program and then not being successful. So, we're trying to slow ourselves down, select the right dealers, and have a higher percentage of the dealers that join our program achieve success. So, what you're seeing there is, I mean, we'd like to be able to accomplish that without seeing lower volumes.

And so far, we've been unsuccessful at that. So, we're trying to have a lower failure rate, if you will, on new dealers. And we're still working internally on how we achieve that and still get the volume that we'd like to get from new dealers.

Got it. Okay, and then despite those numbers, kind of, year-over-year being down, what you talked about in the release was that the strategy you kind of embarked on was a reduction in pricing to savor higher volumes that you instituted in the end of '09 and in the beginning of 2010. And is that resulting a market share increase that you guys are getting, or just more people are grasping the concept of going out to use your product to do financial purchase?

What we mean by pricing changes is we adjust the advance that we give the dealer at the time of origination. So, the higher the advance is, the more volume we're going to get. The lower the advance is, the less volume we'll get.

So, now that we have capital, and we're ready to grow the business, we've increased advance rates and that has, in fact, resulted in higher volumes. Does it mean higher market share, as well? Yes, for sure, because the overall market isn't changing that much. So, we advance more to drive higher volume. It's as simple as that.

Okay. You're advancing more to drive higher volume, but your return on equity and return on capital also increased. So, is that a function of just kind of the loans you made in the past collecting above what you thought they would make or--?

--Yes. There's a timing issue there you have to be cognizant of. The new loans we're making now, we expect those have about a 3% lower yield than the loans that are on the books right now--.

--Right.

So, as the new loans replace the old loans, you'll see the yield on the portfolio decline. So, that'll affect the yield by 3% or after-tax returns by 2%. And then, we think we can make up some of that. As we grow capital, we'll achieve some operating efficiencies. So, the impact on the after-tax return on capital will hopefully be less than the 2% number I just gave you.

And then, the most important thing to remember is the loan performance will have a lot to do with whether the actual impact on revenue is 3% or some other number. If we can continue to outperform our initial estimates, the 3% could be much less on that. And of course, the opposite is true, as well.

Got it. Okay, that's very helpful. Thank you.

(Operator Instructions). Our next question comes from Randy Heck with Goodnow Investment.

Thank you. Brett, on the last call, or the last release, you guys indicated that January, despite adjustments in pricing or advance rates, January was off to a minus 7 start. I can't remember if it was the whole month or just a couple weeks. But, are you comfortable talking about how the quarter tracked? And perhaps try to explain why it was negative 7 in the early going? Thanks.

January was actually, I think, minus 5 from a unit-volume perspective. February was positive 12. And March was positive 20. A couple things there, one is we made a pricing change in February, which had a positive impact on February and March. We also think the tax season was a little slower this year than it was last year. So, January was worse than it would've been were it not for that factor.

Okay. That's it. Thank you.

Our next question comes from Brett Johnson with Rocket Capital.

Hey, guys. I had a couple more questions. Can you make any comments on your average loan size in the quarter?

Average loan size was up about 10%.

Okay. And then, in terms of the provision for loss, you said that 3.4 million was related to one piece, and then 3 million was related to another. Is that a little higher? So, the 6.4 million is that maybe a little high run rate for the year? Or is that something we should look forward on the other quarters going forward?

I think the best advice we can give you there is to focus on the adjusted results. I mean, that's what--.

--Okay--.

--We look at. The provision has been volatile.

Right.

It's tough to predict. It's a mechanical calculation and it can result in a large provision even when consumer loan performance is in line with our expectations. So, that's why we give you the adjusted numbers, just a little bit easier way to think about the business.

All right. Again, over time, the adjusted results and GAAP results result in the same level of earnings. It's all just timing and it eliminates the inconsistent way in which GAAP treats positive and negative adjustments to forecasted cash flows.

Okay. That's all I have.

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

We'd like to thank everyone for their support and for joining us on our 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.

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