Credit Acceptance Corp (CACC) 2013 Q1 法說會逐字稿

Good day, everyone, and welcome to the Credit Acceptance Corporation first quarter 2013 earnings call. Today's call is being recorded. A webcast and transcript of today's earning call will be made available on Credit Acceptance's website.

At this time, I would like to turn the call over to Credit Acceptance's Senior Vice President and Treasurer, Doug Busk.

Thank you, Ben. Good afternoon, and welcome to the Credit Acceptance Corporation first quarter 2013 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.

At this time, Brett Roberts, our Chief Executive Officer; Ken Booth, our Chief Financial Officer; and I will take your questions.

(Operator Instructions) John Hopkins, Chartwell.

Good afternoon, gentlemen. A couple of questions for you. The decline in the forecasted collections since 2009, is that adverse selection on the part of what's coming into your portfolio?

Help us out there. I think 2009 originations outperformed our forecast by quite a decent margin.

No. No, just the original forecasted collection amount -- 79.5% in 2009; 77.4%; 74.2%; 72.7%. So, the trend is down in terms of the forecasted collection number. Have you been tweaking your model? Or, is it just --? What is it in the market that you're seeing that's driving you to forecast those numbers lower?

Got you. OK. Historically, we've been in the low 70%'s. Typically, business of a higher quality than that gets purchased by other lenders. Business of a lot lower quality than that is tough to put together. So, we usually end up somewhere around the low 70%'s. It was higher than typical during the financial crisis because of the lack of competition. So, deals that are getting purchased, are done traditionally today, were falling down to us during those time periods.

Thanks. And, then, the decline in the unit and the dollar volume, is that you passing on business? Or, is that loss to competitors?

The latter.

The latter. And, then, you have a pretty sharp increase in your dealer count. Is that a marketing push on your part to expand the base?

Yes, that's correct. When the competitive environment gets difficult because we operate in a very large market, do business with a small percentage of the total dealers, our strategy is to increase the dealer count, because we know that volume per dealer is going to be under some pressure, as long as the current competitive environment continues.

Is that push deeper penetration within your core markets? Or, are you expanding geographically?

No, we do business in all 50 states. So, it's just deeper penetration in the markets we're already in.

OK. And, it looks like a lot of new dealers where you've done one or two or however many loans. Is that --? Do you think that dealers are shopping you, in terms of -- let's bring these guys in, do a couple of loans with them, and see? And, on the flip side of that, I see your attrition rate is pretty high. Is that trending upward?

The first question, the volume that you see per new active dealer is typically a pretty modest number. Part of that is some of those dealers were signed up during the quarter. So, you don't have a full three months. But, I think that relationship between average volume per dealer and average volume per new dealer is pretty typical. I think last year's first quarter, if you're comparing to that, was a little bit higher than it normally is, that 7.4.

In terms of the attrition, it's up versus last year. It's been a lot higher than that. 2010, I think 2011 -- it was higher than where we're at now. So, nothing alarming there, although a little bit worse than it was a year ago.

And, is there internally a return on capital cutoff before you begin to slow the capital allocation to the business? Obviously, it's trending down, and it's a competitive situation. But, is there -- I don't want to say -- a hard and a fast? But, is there a red line that you say -- look, let's just walk from this business, because it's not worth it? Let's not deploy more capital?

The absolute hard cutoff in theory is our weighted average cost of capital, which is about 5.5%.

Right.

But, that --.

So, we're -- that's obviously -- that's not -- fortunately that's not been in place.

Right. Right. One last question. Thanks so much. I see that your increase on premium earned, just year over year. Is that higher fees on the insurance? Or, is that higher volume, higher penetration per loan?

Just we have a larger book of vehicle service contracts out there that are reinsured now, than we did last year at this point.

OK. It's not really then increased penetration?

No.

OK.

No, it's pretty consistent with the growth in the portfolio.

OK. Great. Thank you very much, gentlemen.

Daniel Smith, Peyton Capital.

Good afternoon, guys. It was a pretty good quarter. Can you help us understand --? Can you give us some kind of number in terms of how the durations of the loans are changing? Loans that you're writing today, is the duration any longer than duration of loans that you wrote, say, two years ago? And, if so, how much longer are the durations?

I think the average terms of the loans are listed in our 10-K which was filed a month or two ago. The average duration of the loans that we've written in recent times has been approximately four years. If you go back to 2009, that same number was about three years. It's really a mix issue. We've written loans with a wide variety of terms for a long period of time.

OK. Is four years, is that a long term, compared to if you look over the last 10 years? Is that relatively long? Or, is that closer to normal, than three years is?

No, it's at the higher end of the range.

So, what is the reasoning behind that? Is that a response to competitive pressure? Or, what's driving that change in lengthening terms?

I think if you go back to when I started with the Company 20 years ago, I think the longest term we would write was 24 months. And, I think everything, if I remember right, had to have 25% down. So, we started from that point, and we gradually expanded our policies to be less restrictive as we gathered data over time.

And, so, over the last 20 years, we've accumulated data on 36-month loans and 48-month loans and 60-month loans, and we've gradually moved our policies out as we felt more comfortable we could price that business properly.

So, it is a long long-term initiative. It's not a cyclical initiative?

Correct.

Is the IRR on a four-year loan, is it the same or different than a three-year loan?

It depends on where we're at from a pricing strategy perspective. Today, we have lots have capital. So, we'll typically take a smaller return on a larger loan in order to deploy more capital. We kind of look at it on a profit per unit basis, rather than a return basis. When we enter periods where we're restricted in capital, then we think about it differently.

OK. So, if you think of it in terms of profit per loan, is it -- profit IRR, is it higher for long duration loan? Or, the same?

No, lower.

Lower.

So, we'd accept a lower return if we can deploy more capital.

If you can deploy more capital. So, that --. Originations have been kind of anemic for a while, and yet you're continuing to grow the loan base, and I'm guessing the reason is because the loans are rolling off more slowly incrementally. Is that a true statement?

The lengthening term does work in that direction.

OK. So, if you think about a year ago --. You said in 2009 the average term was three years. And, now it's four years. So, a year ago, what was the average term?

I don't know precisely, but I think it was just a hair short of four years.

A hair short. OK. So, weighted average term, if you think in terms of months, it might be up -- what? -- 10%, year over year? Or, 5%?

Yes, in that range.

OK.

But, keep in mind that the asset that we put on the books is the amount that we pay to the dealer. So, our asset turns over more rapidly than in 48 months.

Because of prepayments? Is that what you're saying?

No, because we don't advance the full amount of the contract. We advance something less than that. So, our advance is repaid more quickly than the contractual term.

Because of principal payments, is what you're saying.

Well, because the customer is paying a larger obligation than the amount of capital that we put forth at the start of the loan.

Yes. But, it would have the same effect on the advance. The advance dollars would stay on the balance sheet longer given a longer term. Right?

Yes.

Yes, everything else equal.

OK. All right. That's my only line of questioning. Thank you.

Nick Zulovich, SubPrime Auto Finance News.

Thank you very much. Some have already been touched on, but just wanted to follow up from the release earlier today. It listed several reasons for the economic profit lift that you all enjoyed. What reasons played maybe a little bit larger role this past quarter? And, why?

The biggest thing is detailed in our release, is that adjusted average capital increased 19% due to the growth in the size of our loan portfolio.

OK. And, mentions talking about competition for subprime. What elements are you seeing that's revving up competition? Is it getting hotter faster than you've seen in years past?

It's difficult to compare periods. The thing that we believe contributes most to variability in the competitive environment is just the availability of capital to the industry and the cost of that capital. And, we currently find ourselves in a situation where there's a lot of capital available to the industry.

And, to follow up on that, do you see that appetites from the investment community softening whatsoever? Is more money being pushed into this particular automotive segment?

It's difficult to say for sure, but if you look at the securitization market as a guide, securitization activity in the first four months of this year has been pretty robust. So, I would say that the competitive environment certainly hasn't become less robust.

Very good. Thank you, gentlemen.

Brian Foran, Autonomous.

Hi. I was wondering if you could touch on the recent CFPB guidance for the banks and anything that might change in your market as you see it, as a result of some of the guidelines they put out in late March?

I think it's too early to say. What you're referring to is the guidance on discriminatory lending. The industry has put out a response to that. We're very much in touch with our industry association. Charlie Pearce, who is our Chief Legal Officer, is very active in the association. So, we'll just continue to work with the CFPB until we get something that's clear, and I don't see it having a large impact on our program.

And, then in terms of the competitive environment, I certainly hear you in terms of availability of capital and what that's doing to pricing. When you look at underwriting terms -- whether it's the term of the loan, the LPV people are using, the collateral assumptions, or used car price assumptions people are using -- is there anything that stands out to you as -- I guess one way to put it would be -- it's just normal mid- to late-cycle underwriting? Or, another way to put it would be, people are starting to get over their skis a little bit. So, is there anything that doesn't go in the normal mid- and late-cycle underwriting and goes in the, quote, this is a little bit worrying bucket for the industry?

I think it's similar to prior cycles. There's hundreds of companies out there that will write a 550 or lower auto loan. They compete on price. They compete on terms. They compete on policies. It's no different than what we've seen in prior cycles.

Great. Thanks.

Moshe Orenbuch, Credit Suisse.

Thanks. I was wondering if you could just talk a little bit to the dealer expansion. Do you see that continuing? Does that accelerate? Does that decelerate from here? And, what's the typical maturity, where you see dealers reach some level of stability in terms of the number of contracts per dealer, and the like?

We do business with about 10% of the total dealers out there. So, there's plenty of market out there. How many of those we're able to enroll in our program, or how quickly we're able to do that, just depends on execution. So, we'll just have to see how those numbers play out. But, definitely pleased to see solid dealer growth through the first quarter.

Typically, dealers will -- if you take a class of dealers that we sign up this quarter, for example, the dealers that stick and continue with the program for months and years typically have their volumes increase. But, on the other side of that, you have a lot of dealers that drop out from that class. So, you can't count on -- as those new dealers season, you can't count on average volumes per dealer increasing.

Right. And, that seasoning is a couple of years? Is that -- until they can collect a fair amount of cash? Is that --?

If you look at it on the way I just described, if you take a typical class, the average volume per dealer from that class would continue to increase over a long period of time -- 10 years.

10 years. OK. All right. And, you had a couple of questions about the competitive environment. You said it was normal for this -- relatively normal, comparable to prior cycles. But, any --? Is it just that the existing competitors have gotten more intense? Or, is there anyone new coming in?

It's both of those. We've seen a lot of new entrants in the market. A lot of companies that have typically played at a higher credit tier have dipped down. So, we're seeing all those. It's a very large market. Again, hundreds of companies are out there. It's not any one or two companies that drive the market. It's just, as Doug mentioned, there's a lot of capital out there. So, we're going to have a lot of competition until something happens to those capital flows.

OK. Thank you.

Arieh Coll, Coll Capital.

Good afternoon, gentlemen. Thank you for doing this call. Question number one. I was just trying to understand over the past couple of years what kind of win rate you tend to have on your originations. I would just presume that when you were in -- had capital available -- let's say in the 2009 timeframe, just to make these numbers up -- you might have had a 50% win rate in origination, because so much capital disappeared from the industry. I'm just wondering how dramatically that win rate has declined to today, as there are as you suggested hundreds of players as opposed to a much fewer number four years ago?

You could probably just look at the average volume per dealer as a guide, and just track that from year to year. In terms of the win rate, we're typically looking at the loans that everyone else has turned down. So, once they decide it's a Credit Acceptance deal, the percentage of those that we convert into actual loans doesn't really vary a lot across cycles, not as much as you might think. It's just we don't get as many looks as we would if it were less competitive.

OK. So, today, what you're saying is you're getting fewer looks today than you were before, which is what would impact volume growth.

Correct.

OK. So, to get more looks -- I know you've adjusted your advance rates twice in the past year -- what other sorts of things would you consider doing to try and improve the amount of looks you get, so that you can have a better chance to increase your loan volume but, obviously, do it on a good risk adjusted basis?

It's everything we do. Some of the more obvious things are just signing up more dealers, which we've worked toward that by expanding our field sales force. But, how much business we do is a function of everything we do as a company. Of course, the dealers get 80% of what we collect, once they pay back the advance. So, improving our collections will improve how many deals we get from dealers. Improving our service in the origination side will increase how much business we get. It's everything we do.

Just lastly, clearly, you say in your press release for the past four or five years your collections percentage -- or, is it dollars? -- has been above what you'd been forecasting, or estimating. If you look at your unrealized profits on your current book of business, over the next four years assuming the economy is status quo, how many millions of dollars of extra profits would you have coming your way just by having the business season and come in above your forecasted, your actuarial estimates?

It's hard to say. It's easier to see that our forecasts were conservative in hindsight, but that doesn't mean they'll continue to be. We had three years where we were on the other side of that. So, the current estimates are our best guess. So, in theory, the answer to that is there's no unrealized profits. There's no windfall coming our way because our estimates are conservative.

OK. And, just lastly, in terms of demand for subprime auto loans out there, any industry data to suggest by how much that demand is actually growing, or maybe even declining, the past four, six months for the industry?

I think the changes in the size of the overall market are small enough that we don't pay much attention to it. It's not going to affect our results, because we have a very small share of a huge market. And, whether that market is 3% or 4% bigger, or 3% or 4% smaller, isn't going to probably make that much difference.

OK. And, you would guess your market share approximately is where, of the industry today?

Depending on how you measure it, 3%, 4%.

Got it. OK. Great. Well, thank you and best of luck.

Thanks.

John Hopkins, Chartwell.

Just a follow-up to a previous caller, your loans are a longer term, and you have a higher advance rate out to dealers. So, does that then flow that there's going to be slower portfolio churn? So, the portfolio in essence is going to continue to lengthen, not only as a function of the longer term but also as the higher advance rate that you're having to give to a dealer? So, it takes you longer to get that back?

Yes, both those are true.

OK. OK. Great. Thanks. Appreciate it very much.

(Operator Instructions) Randy Heck, Goodnow Investment Group.

Thanks. Hello, Brett and Doug.

How are you doing?

Just another great quarter on collections. So, congratulations there. Second, just a follow-up on the question previously, or some time ago, about duration and length of loans. Can you just walk through the simple math of given that you're first of all only advancing 46 cents, 47 cents on the dollar and, secondly, that you're getting paid back first before the dealer holdback is paid, that four-year loan, the actual duration to you is -- well, it's probably not two years, but it's something between two years and four years. Right?

And then, finally, what does that tell us about the impact of the really strong vintages from 2009, 2010? Are they almost worked out of the portfolio at this point, as it -- for Credit Acceptance, the impact on returns, and so forth?

Yes, in the quarter, we had a loan portfolio that was on average a little less than $2 billion. If you look at the roll-forward of loans receivable, we collected on a principal basis a little less than $350 million. So, if you annualize the $350 million, you get to about $1.4 billion. So, the turnover of the asset is a little less than two years.

Logically, that would mean that the vast majority of the finance charge revenue and the asset on our balance sheet consists of 2011, 2012, and the first quarter of 2013 originations.

Right.

OK.

And, we give you those numbers -- page 2 of the earnings release has the -- % of Forecast Realized. There's a table. 2009, 96% realized. So, obviously, that's almost gone. 2010, 83.4%. You see those numbers. So, what Doug said is supported by page 2 of the release.

OK. So, it's fair to conclude that the $2.42 (sic-press release) that you earned this quarter is really a reflection of the returns -- the spreads that you locked in in the last two years, for the most part. It's really not a reflection of the good times of 2009, 2010.

That's correct. Yes.

Yes, for the most part. Yes.

Yes. OK. That's it. Thanks a lot.

Thank you.

And, 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'd like to thank everyone for their support and for joining us in 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.