Credit Acceptance Corp (CACC) 2011 Q4 法說會逐字稿

Good day, everyone, and welcome to the Credit Acceptance Corporation fourth 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.

Thank you, Carolina. Good afternoon and welcome to the Credit Acceptance Corporation fourth 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've concluded our prepared remarks, we've 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 $51.3 million compared to $43.6 million for the same quarter of 2010. Earnings per diluted share were $1.96, a 24.8% increase over the $1.57 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 $143 million in 2011.

During the most recent quarter, economic profit was $38.9 million, a 22.4% increase over the $31.8 million reported in same quarter of the prior year. Economic profit increased during the quarter primarily due to an increase in the amount of capital invested in our business. Average capital invested for the quarter was $1.5 billion, which is up 33.9% from the fourth quarter of 2010.

Our return on capital declined by 200 basis points compared to the same period of 2010, while our weighted average cost of capital declined by 100 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 fourth quarter, from increasing the size of our business rather than from increasing our return on capital.

During 2010, 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. 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're able to accurately assess consumer loan performance at the time the loans 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 December 31st, 2011, exceeded our expectations at the beginning of the quarter. Forecasted collection rates for loans originated in 2009, 2010, and 2011 improved, 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 32.1% and 25.3%, respectively, during the fourth 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 of $50 million or $1.91 per diluted share compared to net income of $47 million or $1.69 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 $51.3 million or $1.96 per diluted share compared to $43.6 million or $1.57 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 increases in active dealer partners, the size of the average consumer loan originated, and advance rates.

In addition, both our GAAP and adjusted results were negatively impacted by an increase in interest expense, while our GAAP results were also negatively impacted by an increase in the provision for credit losses.

Interest expense increased to $15.1 million for the quarter compared to $11.7 million for the same period in 2010 as a result of an increase in the average amount of debt outstanding offset by a decrease in the effective interest rate.

The provision for credit losses increased to a provision of $6.6 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.

The last topic that I want to mention today is our liquidity. We completed a $200.5 million asset-backed secured financing during the quarter and continue to be in a very strong liquidity position with approximately $365 million of unutilized borrowing capacity under our revolving credit facilities as of December 31st, 2011.

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). And our first question is from the line of John Rowan with Sidoti & Company. Please go ahead.

Evening, guys.

Evening.

Doug, you said it was $365 million of availability, correct?

As of year end, correct.

Okay. Is there anything over the next couple of quarters that can you're your average cost of debt down, or is kind of the fourth quarter run rate a good number to pull going forward?

Based on what we know today, including the forward curves, I think the fourth quarter run rate is reasonable.

Okay. And then just one last question. Obviously, you guys are seeing material expansion of the loan portfolio. You still have good liquidity. Is there any chance of buybacks here, or are you just going to keep a lot of dry powder around for loan growth?

We'll continue to look at that like we always have. It's based on a number of factors, including how much capital we need to put back in the business and the share price. But, we'll continue to look at that.

Okay. All right. Thanks.

Thank you. And our next question is from the line of David Burtzlaff with Stephens. Please go ahead.

Afternoon, guys. Just wanted to see your perspective on the competitive environment. Is there anything different out there that you're seeing right now that will allow I guess the portfolio growth to continue?

It's hard to predict the future. All we can do is look at the last quarter. We obviously originated a lot of loans last quarter, and we're happy with the profitability. So, that's really our best assessment of the competitive environment is just looking backwards and saying, how did we do last quarter? We're pretty happy with the result.

Okay. And did you say you did not increase pricing this quarter?

That's correct.

Correct.

Okay. Do you see a need to maybe increase pricing in the future, or do you think we'll kind of stay at similar advance rates for the near future anyway?

It's hard to predict what will happen. The competitive environment goes through various cycles. And if it gets more competitive, we might have to increase advance rates. If it doesn't, we won't. It's -- we'll just respond appropriately based on the formulas that we use.

Okay. So, basically, your overall portfolio yield will continue to tick down just a little bit going forward do you think?

Not -- if we don't change pricing from here, the overall yield is likely to decline. And of course, how much it declines depends in part on how the collections come in versus our forecast.

Okay. All right. Thank you, guys.

Thank you. And our next question is from the line of Sanjay Sen with Bloomberg. Please go ahead.

Hi there. It's Sanjay from Bloomberg. Hi, Brett and Doug, Jeff. I know the environment's always variable and stuff like that. But, I just wanted to get your take on a couple of things. Just as we stand right now at this current juncture, as you look -- if you just look at where it is right now, do you anticipate that you would necessarily need to see lower returns on capital as you keep growing the book as you did in the fourth quarter, just if you look at environment like it is right now? That's the first question. The second one is on dealers. I'll come back with that in a second.

Again, if nothing changes from current pricing, we would expect the yield to decline. We'll make back some of that very likely with operating efficiencies, but not all of it. So, our expectation would be that the return would decline based on current pricing.

Right. And again, as I said, just as we stand right now in this environment, I know it moves around, Brett, a lot. There are still opportunities to continue to grow just as we stand right now regardless of if it changes. Obviously, you want to grow the book less, and we want you to grow it less. But, just as we stand right now, does the opportunity still exist?

Yes, I think there continues to be -- as Brett mentioned, looking back at that quarter is our best assessment of the environment. But, looking at that quarter, you would conclude that there continues to be opportunity to grow the portfolio with our current pricing.

Good. Okay. And on the dealers, just a two-pronged one. Just what you're seeing out there, the attrition number was low, just what you're seeing in terms of the current environment in terms of competition for dealers by other guys and also how you're seeing like the signing up of new dealers and how that's looking to you guys.

No real change there. We had a good fourth quarter. There's -- we were lucky to operate in very large markets. There's no shortage of dealers that are out there that we can sell to. We can just look at our track record and say, historically, when we've had capital, we've been successful at expanding our program to more dealers, and we would expect that to continue.

Great. Thanks a lot, guys. Good quarter.

Thank you. And our next question is from the line of Randy Heck with Goodnow Investments. Please go ahead.

Hi, Brett. Hi, Doug.

Randy.

Hi, Randy.

My question also has to do with the dealer count. Again, the attrition is a very good number relative to history. And I guess I don't know if this is the second or third quarter in a row it's been at this level, but quite good. And at the same time, your -- I guess your dealer count year over year is up about 26%, active dealers.

Yes.

So, at the same time, you've talked about the business getting a little more competitive. That's kind of the opposite -- that's going in the wrong, the opposite direction. So, does that -- what does that reflect? Does that reflect you're just doing a much better job convincing dealers that your model's the best model or attractive model versus previous or your customer service level's terrific and that's why more dealers are joining and fewer are churning? What would you suggest that is?

I think it's hard to isolate. It's hard to look at the result and isolate the factors. It's all those things. The volume we write with the dealers reflects everything we do, from collections to the service we provide in originations to the quality of the service that they're getting from their sales rep. It reflects pricing. Certainly, pricing has something to do with the number of dealers that we're able to maintain a relationship with. We're expanding the sales force. We're pricing fairly aggressively versus where we were a year ago. I think all those things led to a positive result.

Okay. Well, terrific. Thanks a lot.

Thank you. (Operator Instructions). 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. Do we have another question here? No? Okay. 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.