Credit Acceptance Corp (CACC) 2014 Q3 法說會逐字稿

Good day, everyone, and welcome to the Credit Acceptance Corporation Third-Quarter 2014 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, Candace.

Good afternoon, and welcome to the Credit Acceptance Corporation Third Quarter 2014 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)

Our first question comes from the line of John Hecht with Jefferies.

Thanks for taking my questions. This seems like old hat, but you did give an update with the CID and you talked about some dealership arbitration. Number one, is anything new with the CID that you announced and is there anything new with this dealership arbitration that you're announcing?

There really isn't anything new on either matter. We've submitted the requested information to the FTC and are basically waiting. Nothing new on the arbitration front.

Okay. New dealership growth kind of resumed after a little bit of disruption last quarter. I think the last couple of years, you've been focusing on hiring reps to get new dealers. I'm wondering if you could just talk about the efforts there and kind of the willingness of new dealers to sign up new lenders at this point in time?

Probably the same story as last quarter. We grew dealers at roughly 10%, about the same as in Q2. The salesforce grew slightly, I think, year-over-year, but not a significant amount. We are still focused on filling in the salesforce that we have. We ramped it up pretty quickly and we're just trying to get the existing salesforce more productive at this point. The numbers are what they are. We'd like to be drawing dealers a bit faster than what we are, but 10% is what it was for the quarter.

Last question, can you comment on the end markets? It looks like your discount rate trends are stabilizing, maybe you're still able to show dealership and portfolio growth. I know you'd like it more. We heard from Allied this morning that suggested that maybe pricing pressures were normalizing or coming down and you have got a lot of regulatory pressure on the banks to maybe have them pullback? Are you seeing any of the normalization of credit trends or is it still hypercompetitive out there?

I think it's still very competitive. I think the best things to look at for us is buying per dealer, which is at the low end of the historical range. If you want to look at revenue yield or the spreads in our table, those are also -- we're pricing about as aggressively as we ever have. So the combination of those two things leads us to the conclusion it's still very competitive out there.

Still competitive, but getting worse or stable competitiveness? Any kind of color there?

I would say the numbers speak for themselves. The unit volume growth is roughly the same as last quarter. We didn't change pricing on the portfolio program, which is 90% of the business. We did get more aggressive on the purchase program, that represents a pretty small part of the business at this point.

Great. Really appreciate the color, guys.

Our next question comes from the line of David Henle of DLH Capital.

Could you spend a second talking about what impact, if any, gasoline prices, to the extent they stay down here, will have a beneficial effect to your business, either on the credit loss side or in terms of loan demand?

Probably not a material impact either way. Gas prices is something that you intuitively might think would impact our business, but over a long period time, when we've looked at it, we haven't found a significant impact.

Okay, thanks.

Our next question comes from the line of Robert Dodd of Raymond James.

Hi guys. On the purchase program, which you said is a relatively small part of the business but it has been growing and you've been getting more aggressive on that front, when I look at the table, and these are very small changes I understand, but there's five vintages where the forecast collection was revised down by 0.1%, a very small number. Obviously, so far it looks like that deteriorates a little bit in the third quarter versus the first two quarters of 2014.

So can you give us any more color on where you think they capital return is in terms of appropriateness on continuing to expand that purchase program, given that the spread has been ticking down the past few quarters?

Can you help me out the premise of your question? Which periods did you see where the collection --

2014, 2013, 2011, 2009, and 2008 all forecast collections ticked down on the purchase program by 0.1%. Small, but they all moved down versus what was in the queue for the second quarter, for example.

Again, pretty small numbers there. We're happy with the performance of the purchase business, happy with the performance of the portfolio business, at this point. With the portfolio business, a big part of that program is the alignment of interest with the dealer. So the dealer makes money if the customer pays and the amount they make is proportionate to the success in the collection part of the process. We like to keep the integrity of that program by making sure we have -- we're selling dealers a program that pays out money over time, that we make sure there is money overtime to pay out. So we can't over-advance on that program or really compete on price, at least that's been our philosophy.

The purchase program doesn't have that same constraint and so we can price to achieve the best mix of unit volume and profit per unit, which is what we're doing there. So we continuously run different challengers at different price points and we pick the one that we think is optimal and that's what we've done with the purchase program. So, we've executed that strategy and the results are ones that we're happy with at this point.

Perfect. One follow-up if I can, you mentioned trying to improve kind of productivity per salesperson, but also productivity per dealer. Is there any new initiatives you're doing to try and boost that? Obviously, volume per active dealer follow into the historic range -- is there anything new on the car to try and move that number higher?

I don't think any game changers. We think volume per dealer reflects the competitive environment, but it also reflects everything we do as a Company. The quality of our product includes the origination function, the sales function, and the servicing function to the dealers benefit. If we get better at servicing the loans. So, volume per dealer reflects everything we do and we're always trying to get better at everything we do. In terms of strategy change or game changer, there's nothing that we're prepared to announce today.

Thank you.

The next question comes from the line of John Rowan of Sidoti & Company.

Good afternoon guys. Can you just talk to how you see the world going forward? If the CFPB or any regulatory agency decides to come in and set a flat dealer mark-up system? I know your system's a little different in the way that the mark-up is done, but I want to know, does it help or hurt you in the long run if there's some type of flat pricing system?

As you mentioned, our program works a little bit differently. We don't use the buy rate/sell rate mechanism that's very common in the industry, so the impact might be less direct on us. For the most part, regulatory changes that affect everybody probably have a neutral impact.

Okay. Thank you very much.

Our next question comes from Amy DeBone of Compass Point Research.

Hi, thanks for taking my question. But can you provide a breakdown of income direct, third-party products that go into the finance income line versus other income? I understand that a portion of it feeds into both?

I will try. The major components of other income would be income that we earn from one of the third-party warranty products, from the GAAP product, from sales of GPS-SID units, dealer enrollment fees, those would probably be the four largest components of other income. Premiums earned is the second relationship we have with a vehicle service contract provider. In terms of finance charges, Ken, is there any ancillary product income that goes through finance charges?

There's the commissions that we earn on vehicle service contracting and GAAP products.

So, there's two components to the ancillary product income. One component goes to through finance charge line and the other component, basically the underwriting gain or loss, goes through either other income or premiums earned depending on the program.

Okay. Then the commissions in terms of size relative to the fees that go into other incomes, is it relatively equal or significantly smaller than the profit share that goes into the other income line?

I don't have that number at my fingertips.

Okay, that was great, very helpful. Thank you.

(Operator Instructions)

Our next question comes from the line of Vincent Caintic of Macquarie.

Thanks. I have two housekeeping questions and then a broader one. First, noticed that the salary and wages declined meaningfully quarter to quarter and I was wondering if that was seasonality or if there are some ongoing expense savings there?

No. About $1.6 million of the $2.4 million decline was just a reduction in stock compensation expense, due to a change in the expected vesting period. The other $800,000 was just a reduction in lower incentive compensation and our servicing function. So I think it's normal quarter to quarter fluctuations. Don't think you should think that there's any long-term savings there just because of the change this quarter.

Got it, okay. The tender offer had a good subscription rate and was successful, so I was wondering if you could share how we should think about share repurchases going forward?

We're going to think about share repurchases the same way that we have in the past. Our primary objective is to make sure that we have the capital that we need to fund anticipated levels of loan originations. To the extent that we're comfortable with that and we find ourselves with excess capital and we have an opportunity to buy back the stock at less than what we think the intrinsic value is, then we'll continue to return capital to shareholders. That's the way we've thought about it for years and don't see that changing going forward.

Okay, got it. The last, broader question, I wanted to get an update on your take on the sub-prime lending competitive environment. As part of that, noticed the 50 basis point slight uptick in your forecasted collection percentage for 2014. If you could describe what might be driving that or if that's just typical volatility in your forecasting? Thanks very much.

With the competitive environment, I think we'll stick with what we said before. The unit volume or volume per dealer is probably the best number to look at in terms of where we are from a competitive perspective. We're pricing as aggressively as we ever have and volume per dealer is at the low end of the historical range, so that leads us to the conclusion that it continues to be very competitive. Over a long period of time, we'll go through periods where it's like it is today and we'll go through periods where it's likely going to be a lot easier than it is today and we just happen to be in one of the more difficult periods today.

The 2014 collections, we try to put our best number forward at the time that we originate the loan. You can see this for 2011 through 2013 originations, those loans, as they have seasoned have performed a little bit better than expected, which has cause our forecasted collection rate on those loans to increase over time. 2014, at this point, is following the same pattern. I think 2014 just reflects the continuing trend of the loans performing a little bit better than we expected when we originated them.

Okay, great. Thanks very much, guys.

Our next question comes from the line of David Scharf of JMP Securities.

I think it's maybe been over two years now, I think September 2012 was the last time you put forth some price cuts to your dealers. I know you're consistently unwilling to suggest there's any easing in the competitive environment out there, but to the extent is not getting worse, is it at least a fair assumption for us to assume that we shouldn't be looking at any fee reductions in the near-term, given it's been two years during a much more competitive environment in which you hadn't had to change it?

Looking forward, I think it's difficult to assess whether those would be required or not. I mentioned we're a little bit resistant too changing price on the portfolio program for the reasons I indicated. We have a little more flexibility to compete on price with the purchase program. We'll continue to price using the same formula. We just try to optimize unit volume times profit per unit and so the competitive environment will dictate, at least on the purchase program, where that price ends up. But predicting where might be next quarter or the quarter after, I really don't have a guess there.

Got it. Thinking about dealer growth, it sounds like you're pleased with about 10% year-over-year. As you just look at kind of the seasoning of the more recent hires on the salesperson side, is 10% a decent benchmark for us to think about you being able to sustain over the next year?

I think it's tough to say. We'd like to be growing our dealer base faster than 10%. There's a lot of dealers that could benefit from our program that don't have it. There's a big universe of dealers. We operate in a large market, but 10% was the best we could do in the third quarter and what it is going forward, we'll just have to see.

Got it. Thank you.

Our next question comes from the line of John Rowan of Sidoti and Company.

One follow-up on the comp question, the $1.6 million that was reflected because of a change in the vesting period of stock options, is that a reversal from a prior accrual? I'm trying to get at whether or not that $1.6 million comes back into the comp line or if that's a permanent reduction in the run rate?

I don't think you can say it's a permanent reduction. We forecast the rate at which our restricted stock and restricted stock units will vest every month or every quarter. Based on your financial forecast, you come up with different results sometimes. So it happened to be a reduction in expense this time. There have been other periods when it's been an increased expense, so I don't think you can conclude that it's a permanent reduction.

But was it a reversal from a prior accrual?

Yes.

Okay, thank you.

The simplest way to think about it is the stock comp is $1.5 million to $4 million a quarter over the last couple of years and it's closer to the lower end of the range this time and it fluctuates. I think the thing to remember is the expense number in the third quarter reflects a stock comp number that's at the low end of the range. So, as you're modeling, you probably want to take an average over a few quarters and not just use the third quarter.

Thank you.

Our next question comes from the line of [Kevin Paul] of [SG Capital].

You've talked just about the dealer growth. If we continue to see dealer growth stay sequentially at this level, which it has been at the last few quarters, as you look into next year, we're going to start to see that dealer growth look like it's flat on a year-over-year basis. In that sort of environment, with flat dealer growth year-over-year and volume per dealer, looks like the competitive environment is still soft, would you guys expect to see revenue growth in that scenario next year?

In your scenario, if we don't grow dealers, I think it will be difficult to grow revenue.

Got it. On the attrition, it looks like the attrition for dealers was a little higher this quarter, sequentially. Is that a function of -- it seems like when I talk to dealers and talk to competitors, like Exeter and Westlake seem to be the primary competitors in this space, is it the upfront fee that you guys charge that the dealers -- is that the primary reason why they would choose one of the competitors? The $10,000 upfront free, is that a big stopping point in the sales cycle in your opinion?

I think there's two things there. One is attrition, which means they're joined the program and they've left. That's one variable and the other is just our success in signing up new dealers. If we look at the new actives per quarter per sales rep, that's remained pretty steady over a long period time. We always say we can do better, but the numbers are what they are and that's been pretty steady. There's different aspects of our program that a dealer would evaluate. I think we win our share and certainly those other companies would win their share as well.

Got you. There was an article today that came out from the OCC. They cited some concerns around just overall delinquencies in the industry are up about 10% year-over-year in bank charge-offs. It seems like we've seen some sort of uptick in delinquencies. I know that's more on the dealer's books. Is that also part of the reason why you think you're starting to see dealer growth slow here little bit?

It's my understanding under your model the dealer holds 80% of the credit risk. In theory, if we're going through an environment with low credit delinquencies, CACC is the model that the dealer would choose and if we're going through a period of higher delinquencies, you'd think they would choose the other models out there where they don't have the back-end credit risk. Is that a fair assumption? If we're going through a cycle of increasing delinquencies that, that sort of scenario may play out from a competitive standpoint that you maybe from a market share standpoint?

I think there will be a point where delinquencies increased meaningfully. I think a lot of the numbers you see today that are percentage changes over last year or sometimes they like to use two or three years ago, you're talking about a cyclical pattern where delinquencies went down to historical lows and they've started to come off those lows, but they're still at the low end of the historical range. I don't think there's been any alarming changes in delinquencies.

We would like to see industry delinquency rates increase, because that would probably be an indicator that we're sort of moving out of this part of the cycle. But I don't think dealers are really making their decision based on those sorts of numbers. If you look at our loan performance statistics that are in our release, you can see they've been pretty steady over time. So I don't think dealers would be weighing sort of macro delinquency trends in deciding which program to use.

Okay, got you. The last question on the funding environment, the cost of funds, it looks like some paper was written a couple weeks ago. The credit spreads widened about 40 basis points. Is that just a function of the cost of funds or do you think going forward, start to tick up sequentially? How do you sort of think about that?

The cost of funds on the securitization that we did in September was about 30 basis points wider than the securitization we did in April of this year. The credit spreads were the same. Virtually all the increase was due to an increase in base rates. I don't have a crystal ball relative to rates, but obviously rates are at historic lows. They have nowhere to go but up. How quickly that will occur is really anyone's guess. Based on the current mix of our debt and the forward LIBOR curve, we don't see any material change in our effective interest rate for the remainder of the year and first part of next year. But again, that's assuming that the LIBOR curve and the mix of our debt remain relatively constant.

Got it. Thank you.

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. We look forward too talking to you again next quarter. Thank you.

Once again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation and you may all disconnect.