Credit Acceptance Corp (CACC) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to Credit Acceptance Corporation's first quarter 2011 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. Sir, you may begin.

Thank you, Sayeed. Good afternoon, and welcome to the Credit Acceptance Corporation first quarter 2011 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 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 has joined us this afternoon for the call. In our earning 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 $46.2 million, compared to $35.5 million for the same quarter in 2010. Earnings per diluted share were $1.68, a 50% increase over the $1.12 reported last year. 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 $32.9 million, a 42.8% increase over the $23 million reported in the same quarter last year.

Economic profit increased during the quarter, due to an increase in the amount of capital invested in our business, an increase in our return on capital, and a decrease in our cost of capital. Average capital invested for the quarter was $1.2 billion, which is up 19.2% from the first quarter of 2010. The increase in average capital is due to the increase in loan originations in recent quarters. Our after-tax return on capital was 18%, compared to 17% for the same period of 2010. As we discussed in the release, our return on capital improved as a result of lower operating expenses, as a percent of average capital, and an increase in other income.

As I mentioned in recent conference calls, 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 is not expected 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 much of 2009. During the first quarter of 2010 and the fourth quarter of 2010, we made pricing changes that have reduced the return we expect to earn 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 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 on our operating and financial results, as well as 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 will likely attain our target return on capital and produce acceptable financial results.

Since accessing 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 March 31, 2011, was generally consistent with our expectations at the beginning of the quarter. Forecasted collection rates for loans originated in 2010 decreased, while the forecasted collection rates for loans originated in other years were generally consistent with our expectations at the start of the period.

Moving to loan volume. The dollar and unit volume of consumer loan originations increased 59.3% and 36.7% respectively, during the first quarter of 2011, as compared to the same period in 2010. Our growth rates during the quarter indicate that the competitive environment is still very favorable, though more competitive than it was a couple of years ago. Moving to financial results, we recorded strong financial results for the quarter, with GAAP net income of $43.2 million, or $1.57 per diluted share, compared to net income of $32 million, or $1.01 per diluted share, for the same period in 2010.

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 the material adjustments is contained in our earnings release. On an adjusted basis, consolidated net income for the quarter was $46.2 million, $1.68 per diluted share, compared to $35.5 million, or a $1.12 per diluted share, for the same period in 2010. The increases in both GAAP and adjusted net income for the quarter were primarily due to an increase in finance charges and other income, as well as operating expenses growing at a much lower rate than revenue.

Finance charges increased due to an increase in the size of our loan portfolio, resulting from an increase in loan originations during 2010 and the first quarter of 2011. Other increase -- other income increased, due to an increase in guaranteed asset protection profit-sharing income. Under our arrangement with our third-party GAP provider, we receive annual profit-sharing payments based on the performance of our GAP program; and these payments are recognized as income in the period received. In addition, our GAP results were negatively impacted by an increase in the provision for credit losses.

The provision for credit losses increased to a provision of $8.9 million for the quarter, from a provision of $6.4 million 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 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 purchase 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. Last topic that I want to mention today is our liquidity. We continue to be in a very strong liquidity position, with approximately $250 million of unutilized borrowing capacity under our revolving credit facilities as of March 31, 2010. 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. (Operator Instructions) Our first question comes from David Burtzlaff from Stevens

Good afternoon, guys, and great quarter. Couple questions here. First, on the forecasted collections for 2011, you have those down from what you're experiencing in 2010. Is there a reason for that?

I mean, not really. If you go through our history, we've been very close to our initial forecast. At times, there's a positive variance; at times, there's a negative variance. Obviously, we're shooting for zero there. The largest positive variance we had was coming off the financial crisis. We, in hindsight, over-corrected our forecast, so we saw a bit of conservatism there. We've now adjusted those to reflect exactly what we expect; and we were off a little bit for the quarter, but we don't view that as a material miss.

Okay. But the loans originated in 2011 seem to be at like 73%, which seems to be under where you have been for, say, 2010, or even your original forecast for 2010? Is that because of the significant increase in loan volume?

No, I don't think so. That just -- I mean, we don't really care whether the forecasted collection percentages is 80% or 70% or 60%. We just care that we forecast accurately. So, that just reflects the mix of business that we received. And we originate loans with various collection levels, and it just reflects the mix. It's not significant in any way

Okay. And then, you talk about competition coming back. It doesn't seem to be impacting your loan volumes right now, especially with the strong quarter you just put up, April's up another 26%. When should we expect that, that really starts to impact numbers? Or is that something that you think you can still growth through?

I think that's impossible to tell. I mean, we don't really have a forecast of what the competitive environment is going to do. We can look at the most recent information we have, which is the April loan volumes, and we feel pretty good through the end of April.

Okay. All right. Thank you very much.

Thank you. (Operator Instructions) Our next question comes from John Rowland from Sidoti & Company.

Good afternoon.

Hello John.

Doug, just to go back to the other revenue item, is that a run rate that we should expect going forward? Or is that going to tick back down to its more normalized level?

Well, historically -- our contractual relationship with our GAP provider basically provides that we receive GAP payments annually, and those payments are received in the first quarter of each year. Okay? So, you can go back and look at our historical results in prior years to get a sense of what those amounts have been. All else equal, we would expect that the GAP income that we recognize in the first quarter each year would increase proportionally with the size of our business.

Okay, so it is more seasonal, the number, than, than not.

Yes. It's a first quarter number; so it won't be there in the second, third, and fourth quarter

Okay. And then, the provision expense -- is that largely tied to the reduction in the forecasted collection for 2010?

I mean, that certainly had something to do with it. But, you know, again, because of the way the accounting works, where you record the impact of negative revisions and forecasted collection rates immediately and record the impact of positive revisions prospectively, and the fact that the accounting is done on a loan pool by loan pool basis, you can have a meaningful provision, even if loan performance, in total, is exactly as expected. That's why we really direct your attention to our adjusted results, where we eliminate the inconsistent accounting that the GAAP requires us to follow.

Okay. And just one last question. The finance charges, relative to your portfolio or your portfolio yield, tick down a little bit in the quarter. Is that a trend that we should expect to continue as the lower-spread loans from 2011 and 2010 become a greater portion of what you are collecting?

All things equal, we would expect the new loans that we are writing to decrease the portfolio yield. The only thing I would caution you on is, I would have said the same thing a year ago, and the portfolio yield actually increased during 2010 because of favorable loan performance. So, again, all things equal, I think the -- we -- our best guess is the loans we are writing have a lower yield than what's on the books today. But that didn't hold true for 2010, and I would have been wrong had I said the same thing a year ago.

Okay, thank you.

Thank you. (Operator Instructions) I'm showing no one else in queue at this time. I'd like to hand the conference back over to Management.

Okay. Well, 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.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.