Credit Acceptance Corp (CACC) 2011 Q2 法說會逐字稿

Good day everyone and welcome the Credit Acceptance Corporation second 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, Mr. Doug Busk. Sir, you may begin.

Thank you. Good afternoon and welcome to the Credit Acceptance Corporation's second 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 the measures.

This afternoon, Brett Roberts, our Chief Executive Officer and I, will provide some comments relating toward our operational and financial results as well as our liquidity position. After we conclude 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 would like to turn the call over to Brett.

Thank you, Doug and thank everyone who has joined us this afternoon for the call. In our earnings release, as we report both GAAP and adjusted results, internally we focus 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 $47.4 million, compared to $41.7 million for the same quarter of 2010. Earnings per diluted share were $1.81, a 37.1% increase over the $1.32 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.

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 $35 million, a 21.5% increase over the $28.8 million reported in the same quarter of last year. Economic profit increased during the quarter due to an increase in the amount of capital invested in our business. Average capital invested for the quarter was $1.3 billion, which is up 26% in the second quarter of 2010.

While the return on capital declines as compared to the prior year period, much of the decline was offset by a reduction in our weighted average cost of capital. The return on capital declined by 160 basis points, compared to the same period of last year, while the weighted average cost of capital declined by 120 basis points. If we are successful in growing economic profit in future periods, it is much more likely to come, as it did in the second quarter, from increasing the size of our business, rather than increasing our return on capital.

During the first and fourth quarters of 2010 and the second quarter of 2011, 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, and we are confident that the pricing changes we have made thus far have been consistent with this objective. 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. 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 we originate are still highly likely to be profitable. Overall, consumer loan performance during the quarter ended June 30, 2011 exceeded our expectations at the beginning of the quarter. Forecasted collection rates for loans originated in 2009, 2010, and 2011 increased, while 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 41.3% and 28.7% respectively, during the second quarter of 2011, as compared to the same period in 2010.

Moving to financial results, we reported strong financial results for the quarter with GAAP net income for the quarter of $44.8 million, or $1.72 per diluted share, compared to net income of $49 million, or $1.55 per diluted share for the same period in 2010. The increase in our GAAP earnings per share was due to a reduction in the number of diluted shares outstanding, as a result of stock buybacks completed during the third quarter 2010 and first quarter of 2011. There were 26.1 million average diluted shares outstanding during the quarter, as compared to 31.6 million average diluted shares outstanding in the second quarter of 2010. Partially offsetting this was an increase in our effective tax rate, and an increase in the provision for credit losses.

Our effective tax rate for the second quarter was 36.5%, compared to 26.4% for the same period a year ago. Our effective tax rate in the second quarter of 2010 was much lower than normal, as a result of reversing certain reserves for uncertain tax positions that were resolved and settled with the IRS. The provision for credit losses increased to a provision of $8.9 million for the quarter, from a provision of $1.8 million for the same period a year ago.

Under GAAP, when the present value of forecasted future cash flows decline, relative to our expectations 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.

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 from the quarter was $47.4 million, or $1.81 per diluted share, compared to $41.7 million, or $1.32 per diluted share for the same period in 2010. The increase in adjusted earnings per share for the quarter was due to a reduction in the number of diluted shares outstanding and an increase in finance charges, as well as operating expenses increasing by less than revenue. Finance charges increased due to an increase in the size of our (inaudible) resulting from an increase in loan originations during 2010 and the first of second quarters of 2011, partially offset a reduction in the yield on new loan originations.

The last topic that I want to mention today is our liquidity. We continue to be in a very strong liquidity position, with approximately $220 million of unutilized borrowing capacity under our revolving credit facilities as of June 30, 2011. And now I would 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 from Sidoti & Company.

Good evening. Can you guys give me an idea of how the advance rate trended through the quarter? And what it is currently in July?

We make modest changes to the advance in April, and another change subsequent to the end of the quarter. So, in terms of magnitude, we don't really look at the advance rate, but say, 50 basis points changed during the quarter. These are rough numbers. And maybe a change of about half that size in July.

So we should continue to see the advance rate take off a little bit? Even just on the changes in July?

The advance rate is not really the best number to look at because it is affected by the mix of business. So, if you change the advance rate and you're at a longer-term loan, the advance rate comes down. Don't hold me to that in next quarter's release, because I don't know what's going to happen in the mix of loans. But we made a pricing change in April which is intended to generate more volume in exchange for lower per unit profitability. And we did the same thing in July, to a lesser extent.

Fair enough, thank you.

Thank you. Our next question comes from David Burtzlaff from Stephens.

Following up on previous question with the advance rates. Obviously, your loan volumes have been very strong. You're up against more of a difficult comp in the third quarter of last year, but volumes were increasing 19% in July. How do you feel July went? Is that relative to your expectations? Or, especially with the change in advance rate?

It's tough to conclude after one month, the changes in July were not made on the first of July, they were made in the middle of July. And July had one less business day, which typically affects the overall growth rate for a single month. So, we'll have a better sense at the end of this month of where we're trending for the third quarter.

Okay. And then, on your dealer partners, you have done a pretty good job of adding dealer partners here through the first half of this year. Do you expect that to continue? Or how should we think about that going forward?

We expect it to continue. We operate, as we've said before, on a very large market. We have a very small market share at this point, so we intend to continue to add dealers at about the rate that we have been.

Okay. And then finally, on the provision for losses, I know you guys don't really look at it on a GAAP basis as well. I was a little surprised at how big the provision was given -- especially when seeing the collection rates, seems to be a lot better than you had, say, at the end of March. Was there anything different in there or was it just certain pools that were really underperforming?

There's a few different variables that drive the provision. The most obvious is the one you point out which is just the collection results, which you can see in the release. There's other factors that are not quite as intuitive, like the timing of forecasted cash flows, the timing of forecasted dealer hold-back payments. It was more the timing that drove the GAAP provision this quarter. Again, because that is a little counterintuitive, that's why we put the adjusted numbers out there, which are just a little bit easier to get your head around.

Okay. Thank you very much.

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

Hello Brett and Doug. I have a follow-up question on the dealer partner account. The number does look very good. The attrition is as low as I can remember it. Maybe you can talk about what that means, or why that is happening? And also, how many MAMS do you have today versus what was the number one year ago? How much at success are you having in terms of adding new sales reps, and how productive those sales reps are?

In terms of the number of MAMS, at the end of the quarter, we had about 125 MAMS. That was up a little bit from year-end. I don't know what the exact number was a year ago, but the number was up from year end. In addition, we have about a dozen people that manage the MAMS. We have done a good job adding dealers this year. I think we are pleased with that. Our objective, obviously, is to have that continue. And also to do as good a job selecting new dealers as possible, so that we have a higher percentage of those dealers and ultimately become successful in the program.

And the very low attrition rate on dealers? What does that tell us? Does that tell us that the marketplace is -- what does that tell us about the competitive set right now?

The attrition is impacted by everything we do to some extent, collection results, how good of a service we provide in the originations department. It is affected by the overall market, so the competitive marketplace. It is affected by the economy, it is affected by pricing, so why is it better? I think when we went to the financial crisis, a lot of dealers left our program for reasons unrelated to our program. And then we had it priced very conservatively during the financial crisis. So, dealers left for that release. Both of those are probably working in our favor now. Whether some of those other things that are harder to quantify, like the collection result or how good of a job we are doing in the originations department, are helping us, we like to think that they are. But clearly the pricing is helping us, and the fact that not as many dealers are going out of business today. That's helping us as well.

Okay. Excellent work. Thanks.

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

We would 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. You may all disconnect and have a wonderful day.