Credit Acceptance Corp (CACC) 2013 Q2 法說會逐字稿

Good day everyone and welcome to the Credit Acceptance Corporation second-quarter 2013 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'd like to turn the call over to Credit Acceptance Senior Vice President and Treasurer, Doug Busk.

Thank you, Kate.

Good afternoon and welcome to the Credit Acceptance Corporation second-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 estimates. 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)

Ken Bruce, Bank of America Merrill Lynch.

I got a couple of questions. First, it was very encouraging to see the pick-up in active dealers in the quarter. Could you spend maybe a few minutes and just give us a sense as to what is driving that active dealer number, if it is just boots on the ground or if you are seeing pick-up in terms of interest in the Credit Acceptance product line, please?

No real change in the interest. We have a small market share. There is a lot of dealers that would do well in our program that are not on our program currently so we feel like we got a big market out there. We do have a bigger sales force than we had a year ago and we just continue to sign up dealers at a pretty good clip.

And maybe just give us the contours of when the sales force growth accelerated in -- sorry, I recognize some of this is a little bit of history, but if you could just remind us as to when you saw the pick-up in salespeople and what the sales cycle would look like so we can forecast that particular number, that would be helpful?

From memory, the pick up occurred early 2012 so year-over-year the numbers didn't grow that sharply, maybe were up 10, 15 people year-over-year between 5% and 10%, probably closer to 5% but of course they've been around longer, so you the experience levels greater than it was a year ago.

Okay and just looking at -- changing directions, on the forecasted collections rates, a couple of things, one it looks as if there is a general decline in terms of the expected collections rate just on a year-over-year basis and then you made some mention about the change in the forecast methodology. Can you give us a little bit of explanation or details in terms of what you are seeing there -- if it is just a competitiveness issue and in terms of the specific change in the methodology if you would?

Yes, we have a statistical model that we use for forecasting the loan so every loan is reforecasted each month based on what happened to that loan during the month and the characteristics on that loan, the data we have collected. So we periodically revise that statistical model, so it is pretty routine at this point, every couple of years we update that. We look at all the variables and just update the model with fresh data and a fresh look at the model. So that is what happens -- so you see some of the numbers move around a little bit. I actually view the collection results a little bit differently. I saw the improvement in 2013, 2012, as being a positive sign. Usually when we enter this part of the competitive cycle, the collection rates come under some pressure and we are really not seeing that at this time. In fact, maybe a little bit of a reversal of the trend that we would have expected.

Okay and maybe following that line, what are you seeing competitively either in terms of a lack of willingness to maybe run down the credit spectrum or loosen credit standards or pricing, what is -- the feedback that we had is that this part of the market is seeing a lot more interest and the competitive pressure has picked up. If you could give us some sense as to what you're seeing on the ground that would be helpful as well?

We would agree with that, it continues to be very competitive. The best number to look up there is the average volume per dealer, it was down 10%, 11% this quarter and that reflects the competitive environment so we were able to post some positive unit volume growth because we grew the dealer base but the volume per dealer reflects the competitive environment. We didn't change pricing during the quarter, and volume per dealer shrank by about 11%.

And I know this is going to be a question you want to steer around but I'm going to ask it anyway. Do you have a sense as to what your growth rates should be just given these tensions in the market in terms of the competitive pressures and what you're able to achieve in terms of increasing your active dealers? Do you have a number that you're willing to put out there in terms of growth?

No.

Okay. Well thank you very much. I'll let the next person have questions.

Moshe Orenbuch, Credit Suisse.

Just building on a couple of the earlier questions, it is interesting despite the fact that your enhanced methodology did lower some of your prior forecasts that your current quarter forecast seems to have been improving. Could you talk a little bit about what is going on there? What has changed? Your tone also is somewhat more optimistic?

I will just say, repeat what I said a minute ago, in this part of the cycle, the expectation is that -- and the history is that -- the loan performance tends starts to come under some pressure. So typically adverse selection is of the reason for that, or the reason assigned to that. So you are cautious as you go into this part of the cycle thinking that the large variance and positive variance that we had a few years ago in the opposite environment would likely shrink and we are seeing that happen and we, as it gets more competitive, we might expect it to continue to shrink or possibly even flip the other way so we're watching the numbers a very carefully and we are cautious about that but this quarter was better than you might expect given what we've seen in other cycles.

And just building on that, your level of essentially originations, you talked about the decline in originations per dealer but the total amount is actually growing. Is that -- I would assume that that is a function of an improved confidence in the returns that you're able to generate on that?

The thing to keep in mind is the tax season was delayed as well so the March quarter was probably a little bit better than what the number indicated and the June quarter was probably a little bit worse than what the number indicated. We are up 2% for the year, which is probably a better reflection of what -- of our actual growth rate when you remove the effects of the delayed tax season.

Got you.

Positive growth for the first six months in a difficult environment and strong returns, we are okay with that given where we are in the cycle.

Could you talk about your capital plans in that context, in the context of that level of growth?

We continue to be in a very strong liquidity position. Consistent with the way we run the Business for the last several years, we continue to look 12, 24 months out of at what our capital requirements are and adjust our financing plans accordingly. So we are not doing really anything differently there than we have in the past.

And just to put a slightly finer point on that, as a relates to share repurchase, you did repurchase a little more in the first quarter and saw a little less growth then. Should we be thinking about it relative to the amount of growth that you are seeing or is there something else at work?

We're going to continue to approach stock repurchases the same way we have in the past and to refresh there, our first priority is always to make sure that we have the capital available that we need to fund anticipate levels of loan originations. If we do, and we have the opportunity to buy back stock at a price that is less than our estimate of intrinsic value, we're going to continue to do so. So nothing really changed in Q2 versus Q1. We continue to think about it the same way, continue to employ the same criteria. Though you make a good point -- the faster we grow the less capital we have to buy back stock and the opposite is true as well.

All right. Thanks very much.

(Operator Instructions)

Nick Zulovich, SubPrime Auto Finance News.

Other questions have already been answered but I just wanted to touch on your assessment of the impact of the CFPB, how you have a bolstered compliance efforts and just that the fact that that agency has started to roll out some enforcement actions this year, just what is your assessment of the regulatory landscape with that new agency in place?

Okay. Good question.

We have -- we are used to regulation, we are regulated in all 50 states and so we are used to dealing with state regulators. This is obviously something new. We have had a good long look at it and we are comfortable where we are from a compliance perspective. We've always taken it very seriously. We are watching what the agency does and we are responding appropriately to it. We are dialed into the industry associations and we're certainly in the right circles to be first in line to understand if there's any new expectations for companies in our industry and to make sure that we comply with those expectations. Certainly adds some expense and some things that we -- that they have come out with, we have had to take a hard look at, but there is nothing specific to worry about there at this point from our perspective but certainly we will keep a close eye on it and do what we need to do there.

And also, maybe just to follow up from some of the earlier questions on competition, have you all seen any lessening or intensifying of the more -- other captive lenders or commercial banks buying deeper contracts that might be in the space that you occupy? Has that activity either slackened or intensified from your perspective?

It is hard to say from quarter-to-quarter whether it gets a little better, a little bit worse. There's 100s of players in the sub-prime auto space and no single group is -- or single company is that important but there is lots of people out there that are making auto loans, lots of people making auto loans in our segment of the market that continues to be very competitive and that will continue until there is some change in the capital inflows to this industry.

Okay. Very good. Thank you and congratulations on the quarter.

John Hopkins, Chartwell Investment Partners.

Has the composition changed much between the new volume that you put on that is it dealer loans versus purchase loans and is that a competitive issue as well?

The percent of our originations that consist of dealer loans has been pretty consistent now for a couple of years, over 90% of the business that we've originated for the last couple of years has consisted of dealer loans and that was true this quarter.

Great and can you remind me, you've obviously got a longer period in this industry than me, what was the trough yield -- economic profit yield that you've seen in the past? If I remember correctly, 2006 and 2007 was pretty competitive time period. What were your trough yields at that point in time?

The trough returns on capital were approximately 11%.

Okay.

And how long did that persist?

Just going from memory here, it persisted one year or two.

Okay. Great. Thank you very much, gentlemen.

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

Once again, this does conclude today's conference. We thank you for your participation.