Credit Acceptance Corp (CACC) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to the Credit Acceptance Corporation third quarter 2011 earnings call. Today's call is being recorded. A webcast and transcript of today's earnings call will be available on Credit Acceptance website. At this time I would like to turn the call over to Credit Acceptance Senior Vice President and Treasurer, Doug Busk.

Thank you, Mary. Good afternoon and welcome to the Credit Acceptance Corporation third 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 other 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 earnings releases 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 $49.1 million compared to $39.6 million for the same quarter of 2010. Earnings per diluted share were $1.88, a 35.3% increase over the $1.39 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 ten years we have 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 $36.4 million, a 25.1% increase over the $29.1 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 for the quarter was $1.4 billion, which is up 30.6% from the third quarter of 2010. Our return on capital declined by 100 basis points compared to the same period of last year, while our weighted average cost of capital declined by 50 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 third quarter, from increasing the size of our business rather than from increasing our return on capital.

During 2010 and the second and third quarters 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 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 September 30th, 2011 exceeded our expectations at the beginning of the quarter. Forecasted collection rates for loans originated in 2009, 2010, and 2011 improved, although 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 40.5% and 28.6% respectively during the third 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 $50 million or $1.91 per diluted share, compared to net income of $42 million or $1.48 per diluted share for the same period in 2010.

As Brett mentioned, we also disclose adjusted financial results. We do so to help -- to better help shareholders 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 $49.1 million or $1.88 per diluted share compared to $39.6 million or $1.39 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 due to growth in our loan portfolio. The growth was the result of an increase in active dealer partners and advance rate increases we made during the fourth quarter of 2010 and the second and third quarters of 2011.

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 $4.5 million for the quarter from a provision of a minimal amount 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.

The last topic that I want to mention today is our liquidity. We entered into a new $75 million revolving secured warehouse facility during the quarter, and continue to be in a very strong liquidity position with approximately $225 million of unutilized borrowing capacity under our revolving credit facilities as of September 30th, 2011. After completion of a $200.5 million asset-backed secured financing in early October, our unutilized borrowing capacity is approximately $400 million.

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.

(Operator Instructions). John Rowan, Sidoti & Company.

Doug, you said that $225 million was unutilized, but that's at the end of the quarter, plus the warehouse -- the new warehouse facility -- you said it was $400 million unutilized capacity?

Well, the $75 million new warehouse facility actually was closed during the quarter. On October 6th we closed a $200 million secured financing. So, yes, that leaves our total unutilized capacity at approximately $400 million.

Okay. [Kind of] the implied rate on debt, if you will -- is that a good run rate here going forward, or should we expect any declines in kind of your average cost on debt?

I think the cost of debt in the current quarter is, you know, a pretty fair run rate to expect going forward, given what we know about the interest rate environment.

And was there anything in particular driving the increases in the forecasted collections for 2009 and 2010, and then in particular also the decline in 2011?

So, the -- we had a large positive variance in 2009, inception to date, from the initial forecast. I mean, the primary reason for that is, we reacted in terms of our expectations based on the financial crisis and what we were seeing in the overall economy, and obviously in retrospect we were too conservative there. We adjusted in 2010, but we still proved conservative.

2011 -- if you look at the table, it shows a 30 basis point decline. There's also a table right below that, that breaks out the loans that were actually active for the entire period. And what you see there is, we actually had a positive variance on the business that we wrote for -- through -- for the first six months of the year. And then the negative variance is just the collection rate on the business we wrote in the third quarter. So, really, it's another positive variance, 50 basis points.

All right. Thank you.

William Matthews, Post Advisory.

Hey, guys. How you doing?

Good.

So, can you just give us a sense, historically, why loan growth was fairly substantial this quarter versus historically, and how the opportunity arises in the industry? And also, it looks like, even though there was loan growth in the portfolio, total receivables -- allowances as a percentage of total receivables, declined. So, to me, that means that quality is improving. Is that accurate?

You know, we wouldn't -- we don't really look at it that way. I mean, the allowance is part of that whole GAAP accounting discussion which, you know, it's probably best if you want to talk to Doug about that offline. He can talk for a long time about the GAAP accounting.

We really focused on the adjusted results. And the -- you know, the loan receivable on an adjusted basis is just the present value of future cash flow, so it's real simple that way. If you look at the table of collection rates that we provide on the second page of the earnings release, you can see that over the last three years we've written business that is of a higher credit quality than we did previously. Although that peaked in 2009 and has come down, we don't really care about that so much as we do just the spread between the collection rate and the advance rate.

In terms of the growth, historically we've been able to grow the business when we've had capital, and we're in a good position from a capital perspective today, so we are trying to grow the business. We have a very small market share. There's a large market out there. So, as long as we have capital we expect to be able to grow the business.

Got it. So, I will follow up with Doug for some thrilling accounting discussion. But in terms of the commentary on the growth, it's more driven by, when you get access to attractive capital, than it is necessarily the market opportunity, just because the market opportunity is consistently so large? Is that kind of how you'd describe it?

I think that's fair. I mean, to some extent the competitive environment historically has impacted our growth rates, but right now we've been able to grow the business and add attractive pricing.

Great. Thank you.

Randy Heck, Goodnow Investment.

I have a -- well, I guess it's sort of a follow-up question to that. And that is, growth had been -- growth has been terrific all year, but the rate of growth was slowing somewhat in the last couple of quarters. I mean, perhaps in part due to just -- well, large numbers. And also, as you've pointed out in the past, the competitive environment. It's gotten a little more competitive since 2009, of course.

But this quarter, the growth rate leveled off at close to 30% on a unit basis, and you've pointed out that in October it's actually even faster than that. So, does that reflect a somewhat lessening of the competitive environment? Or does it reflect the success you've had in adding new dealers to your network? I think the number was up -- you had new dealer -- new dealers write business -- the increase was something like 70%. So, is it one or the other of those things, or a combination, or something else altogether?

I think it's tough to separate out the variables. I mean, we had a nice quarter from a growth rate perspective. We were pleased to see that a lot of that came from dealer growth rather than from volume per dealer.

As we've said before, we think dealer growth is a -- maybe a better expectation longer-term of what our growth rate is. Obviously, you know, you can only grow volume per dealer so much, especially if it's driven by pricing changes. Then as soon as you anniversary those changes, that growth's gone, and you're just left with dealer growth. So, that's about the position we're in. Dealer growth and loan growth were about the same during the quarter. But, you know, nice healthy growth.

In terms of how much is competition, how much is pricing, how much is all the other things we're trying to do -- I think it's pretty hard to separate those.

And where does your sales force stand at this point, in terms of head count?

Total sales force at the current time is 147 team members. That compares to 134 at the end of the third quarter last year.

Thanks. Excellent work.

(Operator Instructions). Sanjay Sen, BloombergSen.

Great performance. Just had a quick question for you. If you look at it on a continuum through the year, and how would you characterize what you're feeling about the competitive environment now and how it's been trending, and just where we stand right now in terms of your opportunities to continue to put capital to work and grow?

You know, again, we have a very small market share of a very large market, so we think there's plenty of business to go out there and get. We're happy with our growth rates. You know, it's somewhat (inaudible) the answer to the last question, it's hard to separate out the factors. You know, pricing, the competitive environment, all play in. We're happy with the volume and the profitability of the business we're writing right now, so we're therefore happy with the competitive environment.

And have you seen any worsening in the competitive environment at all, with more capital coming back, or pricing, et cetera, and any of those kinds of things?

You know, it's hard to say, quarter to quarter. I mean, certainly since -- from where we were in the middle of the financial crisis to where we are now, I think it's safe to say it's more competitive than it was during the financial -- during the, you know, 2009 period, for example.

Sure.

But in terms of last quarter versus this quarter, we really don't have a sense for that.

Got you. And you guys have been having great success during the crisis, and now in raising capital. Have you seen any impacts, or read any kind of impacts, that you're seeing on your competitors' abilities either to access capital or not access capital, just based on this volatility in the markets, or is that even not affecting them? I mean, is it a positive for you, I guess is my question?

I mean, I think the current conditions in the market have affected the large -- the larger players in a similar fashion, and that is that they're still able to access capital. It's costing them a little bit more than they expected to do so. But when I say a little bit more, we're talking 25 basis points, 35 basis points. So, given where base rates are at, people are still accessing it on very reasonable terms.

Obviously, our market's very fragmented, so I have really good visibility into a small percentage of the companies that participate in this space. So, I really can't comment on what market conditions are doing to the smaller, perhaps more leveraged companies that may have a lesser operating history.

Thank you, and keep up the great work.

Thank you.

(Operator Instructions). With no further questions in the queue, I'd like to turn the conference back 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.