Credit Acceptance Corp (CACC) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to the Credit Acceptance Corporation's First Quarter 2018 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's Senior Vice President and Treasurer, Doug Busk.

Thank you. Good morning, and welcome to the Credit Acceptance Corporation First Quarter 2018 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 Financial Results section of our news release, which provides a table 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 or comment comes from the line of Moshe Orenbuch from Crédit Suisse.

I've got a couple of questions. I guess one is just about the purchase program. In the past, you guys have said that there are certain requirements for dealers to be in that program. Are those requirements the same? Because that volume has kind of increased pretty significantly over the last 1.5 years and kind of continues to increase in most of the past few quarters. So just has that changed at all? Or is there anything that's different about that?

Nothing...

Nothing's changed.

Okay. Second thing is, in terms of the discussion, and we talked about this in the last call a little bit, so in terms of the discussion about CECL, clearly CECL would require you to take purchase credit-impaired loans and kind of revalue them, set up a loan loss reserve and all the related disclosures. And you talked about the fact that the impact could be material over the last couple of releases. This time, you mentioned possibly going to fair value accounting. Could you maybe talk through the thought process of how the 2 of those alternatives might work?

Well, we're still assessing both alternatives, and our objective there would be to end up with accounting that most closely reflects the economic reality of our business as possible. So we're in the process of assessing both of those things. Once we have something material to report, we'll disclose it in our public filings. If neither of those methods winds up with the underlying economics of our business, we'll continue to include non-GAAP information in our press release to give shareholders better insight into how the business is actually performing.

Right. But I guess my question is, you did add that to the discussion. You must have some sense as to how it would present itself relative to your current presentation. I mean, we saw one of your competitors announce a change for at least the next 2 years in terms of going to fair value accounting and the impact that had on their earnings. I guess any kind of thoughts you can offer there?

I mean, we're really not -- we're obviously working on it. We're working on it hard, but we're not in a position to really disclose anything until we've completed our work and fully understand all the issues.

Yes. I mean, I hate to keep coming back to this, but it seems to me that if you think about your current accounting method, that you're kind of taking into account all of the expected losses, I guess it's just not clear why CECL would present a problem. In fact, it could -- I guess that's what I'm struggling with. I'm trying to understand what about it would be problematic that would make you think of doing some other methodology.

Yes, I mean, maybe we do end up doing CECL. We're -- again, as we said in the Q, we're assessing both CECL and fair value, and if we have something material to report, we will.

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

A couple. One is a question on the network size and dealer count growth, which was quite substantial in the quarter. I'm wondering, is there any way -- based on the investment in new salespeople over the past year and your history with how long it takes them to become productive in your mind, is there any sense you can give us for how we should think about the growth in the dealer network this year?

I think it's tough to say whether -- the first quarter was a strong data point. The fourth quarter last year was also a strong data point. So we've had 2 good quarters in a row. We expanded the sales force in hopes that we would generate more unit volume, and so far it seems to be working out pretty well. But again, hard to forecast the future.

Got it. And I know the active dealer metric obviously moves around quarter-to-quarter based on who actually participated in that quarter. Are you able to provide the active and inactive, just the total number of dealers that are participating in your program today and kind of what the percentage growth is versus a year ago at this time?

I think the active dealer number we provide is probably the most relevant number to look at. I mean, that's -- -- those are obviously the ones that are participating, if they're active. And as you pointed out, it was a very strong quarter for active dealer growth.

Got it, okay. And 2 other things. One is the average yield on the portfolio. Just as we calculate, obviously it came down from last quarter, and I imagine that's a result of the recalibration, the allowances that were taken in the fourth quarter. Based on where your -- the anticipated yields, your booked stuff in Q1 and just the trends you're expecting in the market this year, should we expect the average yield to pretty much remain at Q1 levels for the rest of the year? Or do you see any other downward pressure there?

I mean, that depends on a lot of things. It depends on -- first and foremost, it depends on loan performance. And that's a considerable variable. It depends on the pricing rate we're able to garner on new originations. That will have a big impact as well. So it's tough to -- it's really tough to say. There are some big variables there. And we disclosed quite a bit of information about our yields in the loans we originate in our public filings, and that probably ought to give you enough information to make a reasonable estimate.

Got it. And then lastly, I apologize, I'm going to repeat something Moshe had asked about maybe in a different way. Can you just help me understand how fair value accounting, from a revenue recognition standpoint, technically differs from level yield accounting that you employ now? Because it seems to be very, very similar.

Well, I think in substance, there's a difference between the yield or the discount rate you had used. One is our current accounting is a function of what we paid for the loan and the amount and timing of the amount we expect to collect on the loan. The other discount rate incorporates kind of market elements as determined by [Conceived For Ya], a third party. So you have a big difference just in that alone.

Our next question or comment comes from the line of Jack Micenko from SIG.

The -- you talked about the '15 and '16 vintages causing some of the negative development we saw in the quarter, not surprising given the trend throughout the industry in those over the years. But as those vintages, I guess, come to age and then pay off, I think your '14 is like 90% paid down, do you expect increased volatility on the adjustment? Meaning, as you get closer to final and actual, will that number swing more? Or have the adjustments you think been adequate along the way just given that vintages of loans have been lower performing than others?

I think the history there is that the -- in the early stages, it's more volatile, and as the loans age, it gets less volatile.

Okay, that's helpful. And then the New York -- I know you probably can't say much, but is that -- is there anything different? I mean, you have other states talking about starter interrupt. Is that new development consistent with what other inquiries have been related to?

I think it's hard to compare at this point. It's very early. I think what we disclosed is really what we know at this point. They have -- we had a call. They -- the substance of the call is what's described in the Q, and we're waiting for something in writing.

Our next question or comment comes from the line of Vincent Caintic from Stephens.

So just a few questions. On the spreads, I just saw it kind of tick down again. I'm just wondering where you think it can go, and what you would be comfortable both relative to the growth that you get.

So we don't really price to generate a specific spread, as we talked about in prior calls, we -- our pricing strategy is try to maximize economic profit. And so we set our advance rate so that we've, as much as possible, balance profit per unit in terms of unit volume. So mix of business can determine what the spread is, but we really don't have a target there that we're shooting for.

Okay, got it. And then I guess, from the growth perspective, also overall growth is certainly strong this quarter, 18%. I guess, if you can give us a flavor of maybe broadly where that's coming from? And if anything has changed to drive that? And I guess, from maybe, specifically on the dealer perspective, anything you're seeing there that's different, maybe from the behavior dealers. Just seems like maybe same-store sales on dealership might be waning which maybe, for example, might be driving more engagement from the dealers. Just any kind of thoughts on what's driving the growth in anything specific from the dealers.

I mean, it was a strong quarter. We had increases in volume per dealer, increases in active dealers. And again, it continued the trend we see in the fourth quarter. The expansion of the sales force is clearly helping. We're seeing salespeople that we hired as part of that expansion grow faster than the overall average so we know that they're adding to the total. We're seeing a nice progression there as the salespeople age. So all good things there, it was a very positive quarter from a volume perspective.

Great. But nothing particularly different from the dealer side of things?

No. No. Really, continuation of the trends we've seen, so strong growth in the purchase program, solid growth in the portfolio program, but less so than the purchase.

Okay, got it. Last one for me, I'm sorry I'm going to have to ask another CECL question. My question is going to be even more basic than Moshe and David's question, so if you just really discuss what the alternatives are with CECL. And I mean, what is fair value option accounting? Apologies for my ignorance, but can you just explain in basic terms?

I mean, CECL is an accounting methodology where, as opposed to recognizing a loss when some event occurs, a certain amount of delinquency or a repossession of a sale of a car, you anticipate that loss at the time you originate the loan, and then bulk up a loss upfront. The flip side of that is, I mean, over time, cash equal accounting, so you'd end up reporting some loss at loan origination, and then conceptually here, that recognizing more revenue over time. The fair value option is, you're looking at, coming up with an estimate of the forecasted cash flows that the portfolio would generate and you're basically calculating an exit price, which represents the fair value of portfolio at that point, which as I mentioned earlier, would include an estimate of a discount rate, which will represent the return associated with exiting the portfolio.

Our next question or comment comes from the line of Randy Heck from Goodnow Investment Group.

Brett, the 18% unit volume growth, 33% dollar growth, and also you had, I see, you had 25% volume growth in the month of April. How much of that is from the larger sales force versus, perhaps, an easing competitive environment?

That's a tough one, Randy. I think it's hard to break out the internal and external factors. I mean, we have, we can see the growth that came from the people that we've hired since the expansion started. In rough terms, they grew about twice as fast as the overall book did, so that still leaves decent growth in the sales reps that have been here -- were here before the expansion started. So we're seeing faster growth from the new group but strong growth from everywhere.

Okay. Second question, the adjustments to estimated collections. There is, I think, a $10 -- $10 million reduction in estimated cash flow over the life of the $5 billion loan portfolio, so $10 million less over the next 3 or 4 years, would you consider that a rounding error given that it's $10 million on $5 billion?

Yes, it's a rounding error.

I think probably the right denominator to use is the future revenue that's embedded in the portfolio, the accretable yield we call it in the queue, that's about a $1.7 billion number, so $10 million on $1.7 billion is still a very small percentage, and it's probably less meaningful if you look at it over a period of time. I think we have 4 positive quarters in a row before this quarter. So if you take a 6-month average, the number's basically 0, and if you take a longer average than that, you start to get a small positive number. But your point's well taken. No matter how you look at it, it's pretty close to 0.

Okay. The third question I have, if I may, is this regulatory stuff. It's -- you've got 5 or 6 states that have asked for information over the last -- up to 4 years ago without any development that we can see. You're -- you've been regulated by the CFPB for the last, is it 3 years now -- 3 years in August, I think? So most of that time under Richard Cordray's watch, meaning that pretty -- a -- well, under Richard Cordray's watch, and yet nothing's come of that. I assume you've been audited, too. I don't know if you can disclose that, but -- by the CFPB. But my point is, the CFPB presumably has rules that are similar to New York and pretty much every other state. I know it sounds -- there are some little differences. But by and large, the rules of fair lending and so on are the same, are very similar. Is that a fair comment?

Yes, I'd say there are state differences, but they're not huge differences. I think that maybe the main point here is we've got -- 4 years ago or in the last 4 years, as you point out, we have 7, 8, 9 things that we've disclosed now. I think in the 24 years I was with the company before that, I don't think we had any. So clearly, something's changed in the regulatory environment. We're under a lot of scrutiny. We have been for quite a while now. The regulators have a job to do. We respect that. They're certainly have their -- it's their prerogative to ask questions and challenge the things that we're doing, and it's our job to operate in a highly compliant way, and we take that seriously. And what's disclosed in the Q is just where all those matters stand at this point. As you said, I don't want to generalize. We've been asked a lot of questions. We've provided a lot of answers, and that's where it stands at this point.

Okay. Yes, terrific. And then -- and just, if I may, one last point. I want to say your -- once again, your letter to shareholders is terrific. For anyone that hasn't read it, you ought to. And also, congratulations on 25 years of compounding earnings at north of 20%. Well done.

Thanks, Randy. Appreciate it.

Our next question or comment comes from the line of John Hecht from Jefferies.

Actually, most of my questions have been asked. I guess one question is we've seen your average loan size grow, your term moving out. I know some of that's just predicated on continuing to increase the dealer purchase stuff. But I'm wondering, is there a threshold where we might see some of those -- the term advance, the loan size increase slow down, number one? And the second question is -- I guess it's kind of related to that, is just if you could comment on the overall competitive environment at this point in time as well.

Yes, I think we talked about the competitive environment. Volume per dealer is the number to look at there. It was up this quarter. That could cause you to conclude that the environment was easier. But at the same time, we've made a big investment in our sales force, which could also be driving that number. It's hard to break out what's internal and what's external there. In terms of the average term or the size of the loans, yes, difficult to forecast that. We offer loan terms from 24 months up to 72 months. The average that's in the press release, it just reflects the mix. We offer kind of a broad array of alternatives there, and it's up to the dealers and customers to choose which alternative they like best. So we've seen an increase in the average term; it's just a function of the mix.

Our next question or comment comes from the line of Ken Bruce from Bank of America Merrill Lynch.

My question relates to the ABS market. I noticed that there was a $500 million securitization completed in the first quarter. Could you talk about the -- what the -- if there's been any changes to the terms of the ABS market relative to Credit Acceptance? We heard that there's been a little bit of choppiness in the auto ABS market. Just wondering if that's impacting you at all.

The structure of our ABS hasn't changed in any meaningful way for a number of years. The market in subprime auto has been pretty good really since about the first quarter of 2016. Obviously, some periods are a little bit better than others, but it's been a pretty healthy market. So nothing really material to report there in terms of differences.

And in either spreads or depth of the book, have there been any changes in terms of the market itself? Maybe it's not necessarily reflected in structure, but is there any changes in pricing or depth in the buyers of the paper?

I mean, our last deal, we issued at the tightest credit spreads we had in a number of years. That was offset by an increase in [base] rates, so the all-in costs actually went up a bit. But the credit spreads, obviously, vary over time. But in terms of more recent history, they've been at the tighter end of the historical range. In terms of depth of the book, I'd say over time, as people get more familiar with our program, our -- the depth of the book has generally increased.

(Operator Instructions) We have a follow-up question from Mr. Moshe Orenbuch from Crédit Suisse.

I just wanted to revisit the comments you made about the volatility going down as the security vintages kind of age. And while it's obviously true that as the vintages pay down, each one successively has a smaller impact on the total. But I guess hasn't it really happened that most of the '14 to '16 vintages, you've written them up in the first year, and then kind of subsequently written them down after that? I mean, it seems like it started to happen on the '17 vintage this quarter. You wrote them up during the quarters of '17 and now ticked it down again. So I guess maybe could you address that?

Yes, we disclose it every quarter, so you could certainly see the trend. I would probably just go back to the answer I gave Randy. It's -- the total for the quarter in dollar terms is minus $10.8 million. Is that a big number or a small number, I think the appropriate denominator to use is the accretable yield that's in the portfolio, which is $1.7 billion. So $10.8 million divided by $1.7 billion is a very small number. And then kind of if you look at that over -- more than 1 quarter, it gets even smaller. So you can take that small number and parse it by year or parse it over time, but it still doesn't change the fact that it's a very small number.

Well, that is a small number, but that number is not discounted, correct, so that if there were changes to the timing like you exhibited in the fourth quarter, that wouldn't be encompassed in that change?

It's not discounted. But if we discount it, it would get even smaller.

Yes. I'm saying that if it's...

Discounting it doesn't make it larger.

It seems just that your changes -- if you look at the changes in the Q and K you report, what percentage of your loans actually have estimates that have changed to be better or worse than your original estimates? Those numbers through 2016 were roughly 50%. And at the end of '17, they were 75%. This quarter, it went down a little bit to 70% or so. So that includes where there are changes both to the dollar amount, which is that 10-point-whatever million that you were referring as well as the timing of those cash flows.

Yes.

So I guess that's my point, is that it's not just the $10.6 million, it's also the timing of when that $1.7 billion would be realized.

Right. And we talked about that last quarter. We didn't change the timing estimate last quarter, we didn't make any further changes this quarter.

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 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. You may now disconnect. Everyone, have a wonderful day.