Credit Acceptance Corp (CACC) 2010 Q4 法說會逐字稿

Good day, everyone, and welcome to the Credit Acceptance Corporation fourth 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 web site. At this time I would like to turn the call over to Credit Acceptance Senior Vice President and Treasurer Doug Busk.

Thank you, Ally.

Good afternoon and welcome to the Credit Acceptance Corporation fourth quarter 2010 earnings conference call.

As you read our news release posted on the Investor Relations portion of our web site 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 Bret 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 have 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's joined us this afternoon for the call.

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 that I will refer to in the next few minutes are all on an adjusted basis.

For the most recent quarter, we earned $43.6 million, compared to $35.5 million for the same quarter in 2009. Earnings per diluted share were $1.57, a 41.4% increase over the $1.11 reported last year.

We think about our results in terms of the amount of capital invested in the business and the return we earned on that capital. Our results for the quarter improved due to increase in our return on capital, and an increase in the amount of capital invested in the business. Our after-tax return on capital is 18. 1%, compared to 16.7% for the same period of 2009.

As we discussed in the release, our return on capital improved as a result of lower operating expenses and higher yields on our loan portfolio, offset by decline in premiums earned. Average capital invested for the quarter was $1.1 billion, which is up 14.1 % from the fourth quarter of 2009. The increase in average capital is a result of the growth in loan originations.

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 10 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 profit improved from a negative $5 million in 2001 to a positive $113 million in 2010.

During the most recent quarter, economic profit was $31.8 million, a 36.9% increase over the $23.2 million reported in the same quarter 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 the historical range and reflects a very favorable competitive environment that does not expect to continue.

In fact, since late 2009, we have seen competition return to the market as capital is now less constrained than it was during 2008 and 2009. During the last four months of 2009, the first quarter of 2010, and the fourth quarter of 2010, we made pricing changes that reduced the return we expect from new business and exchange for more volume.

The objective of these pricing changes is not to achieve a fixed-growth target, but instead they are intended to maximize the amount of economic profit we generate on new originations. This requires us to appropriately balance unit volume and profitability per loan. 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 in 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. The 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, or one-time payment to the dealer. If we are able to accurately assess consumer loan performance at the time the loan is originated, we'll likely attain our target return on 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 worse than we expect, the loans that we originate are still highly likely to be profitable.

Overall, consumer loan performance during the quarter ended December 31st, 2010, exceeded our expectations at the beginning of the quarter. Forecasted collection rates for loans originated in 2009 and 2010 increased, while the forecasted collection rates for loans originated in other years were consistent with our expectations at the start of the period.

Moving to loan volume. The dollar and unit volume of consumer loan originations increased 66.9% and 37.7% respectively during the fourth quarter of 2010, as compared to the same period in 2009. Our growth rates during the quarter indicate that the competitive environment is still very favorable, though more competitive than it was 18 months ago.

Moving to financial results. We recorded strong financial results for the quarter, with GAAP net income of $47 million, or $1.69 per diluted share, compared to net income of $40.3 million or $1.27 per diluted share for the same period in 2009.

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

On an adjusted basis, consolidated net income for the quarter was $43.6 million, or $1.57 per diluted share, compared to $35.5 million, or $1.11 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 finance charges, due to an increase in the size of our loan portfolio as a result of an increase in loan originations in 2010, and an increase in the yield on our loan portfolio as a result of an increase in forecasted collection rates on loans assigned in 2009 and 2010.

Partially offsetting the increase in finance charges was an increase in interest expense. Interest expense increased primarily due to an increase in the average amount of debt outstanding during the quarter, as a result of the $200 million stock buy-back completed on July 26th 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 a provision of $1.8 million for the quarter, from the negative provision of $4.9 million for the same period a year ago.

Under GAAP, when forecasted future cash flows declined relative to the cash flows expected at the time of 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.

The last topic I want to mention today is our liquidity. We continue to be at a very strong liquidity position, with approximately $340 million of unutilized borrowing capacity under our revolving credit facilities as of December 31st, 2010.

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.

(Operator Instructions)

Our first question comes from John Rowan of Sidoti and Company. Please go ahead.

Good evening.

Hi.

The loan portfolio -- obviously, there's been a little bit of acceleration in the growth in it. How much of that do you think is due to stronger used car pricing?

I don't think that has a big impact.

Okay.

So our customer -- go ahead.

Okay. No, answer.

The cars that our customers buy are going to be at a certain price range based on the amount of income that they have. And they just get a different -- as used car prices change, they might get a different vehicle, but the overall transaction size isn't going to be any different. Now we have, year-over-year -- we are doing a little bit larger loan than we did a year ago, but that's based on pricing more than it is the external car market.

Okay. I was a little surprised by the -- the operational expense leverage you're on. Certainly, the expenses were lower than what I would have looked for. Is this a decent run-rate relative to revenue, or is it going to move back up a little bit?

No, there's nothing unusual in the quarter. So, as we grow, I think if you look at the historical results, you are going to see that there is some expense leverage there. So if we -- the faster we grow the balance sheet, the more leverage you will see exactly what the run rate is going for. We will just have to see.

Okay. And the tax rate in the quarter was -- it came in a little bit below what I was looking for. What's a good number to use going forward?

36%

36%. Okay.

And then Doug, I think you just mentioned one item -- I want to make sure I have the number right. You said there was $340 million of unused capacity under your credit facilities, correct?

That's correct, as of December 31st.

All right. Thanks.

(Operator Instructions)

One moment while we wait for further questions.

And I am showing a question from Richard Lee of Post Advisory. Please go ahead.

Good afternoon, gentlemen.

Hi, Richard.

How's it going?

Good.

I have a quick question on the consumer loan unit volume, up 38%, quite impressive. Can you just maybe give us some thoughts on, for maybe 2011, how comfortable are you growing that number out at that pace? I mean, it sounds like the competitive environment is not that fierce at this point, where you feel comfortably -- you can grow out that portfolio. I know you sort of historically have grown it 15% to 20% over the history of your Company, but if you could just maybe give us some thoughts on that? And then I have a follow-up to that.

37.7% is higher than what we have grown unit volume historically. I think we're in good position from a capital perspective to handle higher growth. I think we're in good position from an operational perspective to handle higher growth, so exactly what the unit volume growth ends up being -- or the unit volume ends up being for next year -- will just depend on the competitive environment, which is hard to predict.

So that -- would you say that unit volume growth is mainly determined by the competitive environment?

I think it's determined by all three factors, but we feel like we're in pretty good position from a capital and operational perspective.

Okay, got it. And then my final question is, I mean you have put together two years of very solid operating financial performance. Can you just update us where you are with Moody's, and why you think they continue the rate you B1, versus a BB, versus on S&P?

Well, it's a little bit speculation, but I do know that Moody's has had either the consumer finance industry -- or certain segments of the consumer finance industry -- either on negative outlook, or has had in general a very negative view on that industry, for some period of time, understandably. So I think that it's -- again, I don't know for sure, but if think it's primarily industry-driven at this point.

Okay. When is the last time you guys talked to Moody's?

I mean, we have an ongoing dialogue with them, so it's fair to say that we're talking to them every quarter.

Okay, got it. Well, hopefully, you can open their eyes about -- just the financial strength of the Company. Thanks for taking my questions.

Okay.

Our next question comes from Randy Heck of Goodnow Investment. Please go ahead.

Thank you. Hi Brett, hey Doug.

Hi, Randy.

Hi, Randy.

Can you talk a little bit about the number of dealers you're working with? Those numbers also look very good. Your active dealers, your same-store sales per dealer -- and Brett, you made the point that return on capital is probably not going a lot higher, so the way to grow is to increase the amount of business you're doing. And obviously -- you're only business with 25 -- notwithstanding the growth, you're only doing business with 2,500 dealers. I think the adjustable market is substantially larger than that, so what's going on in that respect?

Clearly, growing the active dealer base is -- will be the primary driver of unit volume growth over a long period of time. There's only so much volume per dealer you can squeeze out. We have made pricing changes which impact volume per dealer, but obviously then when you anniversary those pricing changes, they stop helping you grow unit volume and then you are just dependent on your dealer growth at that point.

I also think that the pricing changes we have made have helped us grow the dealers, but that's more of a sustainable phenomenon in our minds than the contracts per dealer. So the 17% dealer growth for the quarter -- I'd certainly rather grow unit volume by growing dealers, than growing volume per dealer, because one seems more sustainable than the other.

Okay. And can you talk about the adjustable market of dealers with the appropriate, or the likely universe of dealers versus your current 2,546 dealers -- active dealers?

Sure. I think that we have looked at other companies that have operated in our space over time. Some of our competitors, or people that have operated in this space, have had at any given point, 15,000 to 20,000 dealers. So I think that over a period of time, that's likely in the ballpark of what the addressable market is for us.

Okay. Thanks.

(Operator Instructions)

Our next question comes from David Burtzlaff of Stevens. Please go ahead.

Hi. Just one quick question. On -- you said you increased your advance rates. What can we kind of look for as an advance rate to model going forward in 2011?

Again, it depends, you know, primarily on the competitive environment. I think we have -- we are well-positioned from a capital perspective to grow, well-positioned operationally to grow. Those are primarily subjective decisions, but we feel pretty good about where we stand with both of those variables.

So the thing that we can't forecast is what the competitive environment will look like. And we -- our advance rates just respond to the competitive environment. So the tougher the competitive environment is, the higher the advance rate will be. If things kind of stay how they are, then you'd probably see an advance rate somewhere to what we have now.

Which is -- I mean because what it looks like at the end of 2010, it's about 44.7%?

Yes.

Is that kind of a good number, or does that number increase slightly from the increase in the fourth quarter?

It would depend on your -- well, okay, from the fourth quarter. It's going to increase. I mean, that number is a tough number to look at because the way that's calculated takes the advance to the dealer divided by the total contract size, so that's impacted by the terminal loan as well. So we could have more aggressive pricing and see a lower advance rate if you got a larger contract or a longer-term loan.

So I don't -- I wouldn't feel accountable saying the 44.7% is necessarily going to go up. It depends on the mix and then it depends on what we do in response to the competitive environment.

Over the last five years or so, the advance rate has ranged from 43.9% up to as high as 46.9%, so it's been a relatively tight range historically. Again, you know, that may not prove out to be true in the future, but it has been a fairly tight range historically.

Okay. All right, thank you very much.

I am showing a follow-up question from John Rowan of Sidoti and Company. Please go ahead.

Hi. I guess maybe just to ask the point -- the question more directly. Do you know what the spread was in January?

I don't have that number, no.

Okay. And then, Doug, I think -- I just want to make sure I got this right. You said the addressable market you're saying now is 15,000 to 20,000 dealers, correct, versus where you were at the end of the year -- about 2,500 ?

Yes.

Okay. And then, what are the -- are there any substantial debt maturities over the next two years?

We have a line of credit that matures -- $170 million line of credit that matures in June of 2012. That's the only substantial debt maturity in next two years.

All right. Thank you very much.

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