Credit Acceptance Corp (CACC) 2018 Q4 法說會逐字稿

Good day, everyone, and welcome to the Credit Acceptance Corporation Fourth 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 Senior Vice President and Treasurer, Doug Busk.

Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation's Fourth Quarter 2008 (sic) [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 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) And our first question comes from the line of David Scharf with JMP Securities.

A couple to start. Maybe first one's for you, Doug. Wondering having finished the year with -- it looks like the average funding cost given were rates that moved, what was up to 4.5%. Just based on everything you've seen both your expectations for Fed actions as well as how spreads have been performing on recent securitizations in the market. Is there any kind of best guess you can give us for how we ought to be thinking about average funding throughout 2019?

Well, I don't really have any expectations for how the Fed's going to behave. I mean, there are people that are lot more informed about that than I am. I will say that if the forward LIBOR curve that exists today is correct and our funding mix remains the same, then you should expect about a 50% or a 50 basis point increase in the rate by year-end of 2019. But, again, that assumes that the forward curve remains the same which is unlikely.

Right. Got it. It's helpful. And maybe transitioning to the competitive side. It seems like spreads on some deals widened last month or so with some competitors even though the benchmark pulled back. But I'm wondering, is that any indication that there may be signs of any competitive shakeout that we've been waiting for years? Or is your sense based on kind of what you saw with volume per active dealer declining that, it still remains as competitive as it was 3 to 6 months ago?

I mean, the -- I don't think the combination of benchmarks and credit spreads at this point has really changed enough to materially impact things.

Okay. So it's status quo. And lastly, and then I'll get in queue. I'm curious as we think about forecasting provision expense over the next few quarters. As we think about the fourth quarter and maybe even third quarter figure that were just reported, were there -- are you starting to recognize any allowance reversals on that big kind of $60 million charge that was taken in the fourth quarter of the prior year? Is that kind of factoring into sort of the net allowance charge this provision expense we're seeing? Or is -- or are those pools still not being revised upward?

I mean, we have thousands of dealer pools and a significant number of purchased loan pools and as we state in our public filings to the extent that we have an allowance against a specific pool and performance improves, we will reverse that allowance. But you can't necessarily say what period the allowance was established and specifically attributable to.

And our next question comes from the line of Moshe Orenbuch with Crédit Suisse.

Great. Kind of continuing on the competitive kind of environment. The -- I guess, as you kind of look at the fourth quarter from one of the tables here at the forecasted collection percentage, it's kind of down from where it's been. And it looks like, obviously, you don't have every quarter on here, but it's lower than any of the individual years and been following, I guess, during 2018. Just talk a little bit about what is driving that and the advance rate kind of rising? And whether any conclusions we should reach from those 2 facts?

You're just looking at the absolute collection performance for each year?

No. When you look at the forecasted collection percentage for Q4 and the advance rate, they both kind of moved in opposite directions compressing the spread between the 2 of them. So I guess, is there -- if you kind of compare it to the early part of the year that was down by about 160 basis points and for various other points in history, obviously, differing amounts.

I think the best thing to do there is, there's quite a bit of information in the 10-Q or this time the 10-K, that goes through the kind of profit drivers of the loans that we wrote during the quarter. That's probably the best place to look and it's not available right now, but if you look at that, I think, what you'd see is that the average size of the contract is increasing. The absolute amount of revenue or accretable yield, we expect is also increasing on a per contract basis. In percentage terms, there is a little bit of compression there because if we get a larger contract, we're willing to accept a slightly lower yield to compensate for that. But other than that there's not -- and the trends I just talked about really aren't that material. So I think when you look at that, your conclusion will probably be from a profit per loan perspective, Q4 wasn't that remarkable compared to the prior quarter.

Got it. I mean, you pointed out that the 10-K is not available for a little while. Anything that we should kind of be thinking about that -- may be things that you would otherwise be talking about on the 10-K. Things like any update with respect to the accounting method and CECL or anything else that we should be aware of?

No update on the CECL fair value discussion. We continue to do a lot of good work there and we'll provide additional disclosure when appropriate.

And our next question comes from the line of John Rowan with Janney.

Did you buy back any stock in the quarter?

Yes, we did. We bought back approximately 337,000 shares at an average price of about $378.

Okay. What was the timing of that in the quarter? Was it back-end loaded? Is the diluted share count from this quarter representative of what it will be going forward?

Yes. The activity during the quarter reduced the share count by approximately 50,000 shares.

Okay. One thing I noticed is that the average loan was up about $200 between even just the third quarter and the fourth quarter, but there wasn't a change in duration. I mean, I know it's not a gigantic change, but is there a change in mix of vehicles that you're selling? Is it just the stronger used car market, the pricing in there? I'm trying to understand, in the past, we always could track the increase in the loan out, then to the consumer with higher duration, but now that didn't come through this quarter. So I'm wondering if there was anything else that drove that higher loan to the consumer.

I think it's -- the selling price of the vehicle is up a little bit. But again, as you point out the change is pretty small.

Okay. But there was no like wholesale shift in the type of vehicle, mileage that your dealer partners are retailing, correct?

No. There is no -- there is a -- the mix always shifts a little bit, but nothing I would characterize as material.

Okay. Can you give us an update as to where we stand with the sales force? Where is the sales force today versus this time last year? What type of growth are we seeing? Anymore hiring? Just give us an idea of where that growth program stands today?

Well, we continue to make progress growing the sales force. We're up about, in terms of the number of men, we're up little over 50 men versus where we were at year-end 2017.

And our next question comes from the line of Mark Hammond, Bank of America High Yield.

I had one question on the capital structure. So I had seen the call price on your [608-21] high-yield bonds stepping down to par in February. Just wondering if you're thinking about dealing with those bonds early with secured financing or something like that to counter that possible 50 basis points increase in funding costs that you mentioned, Doug?

Yes. I mean, we continually assess all our actions from a funding strategy perspective. Relative to that specific bond, you're right, it goes down to par in February. We've got a bunch of options there. Let it run out until maturity. We can just use available liquidity to pay it off or we could issue ABS and replace it that way. So no decision, just assessing our options.

Great. And then just a follow-up on that. Is there any mix that you wouldn't go below in terms of secured financing as a percent of total debt financing?

We don't really have an absolute number. What we do is we try to manage the liability side of the balance sheet so that it provides a good result when capital is readily available, and also provides a pretty good result if the capital to markets are constrained. So the mix of that leverage amount of unused availability are all kind of inputs into that analysis. So there's a -- it's a bunch of moving parts there, and -- but no, no absolute number.

And our next question comes from the line of Kyle Joseph with Jefferies.

Most of my questions have been answered already, but I was just wondering if you could talk about the outlook for tax refunds in terms of timing and magnitude versus last year?

I don't think we really know. There's a lot been written about potential delays due to the government shutdown. There's a lot been written relative to the size of refunds versus what consumers have historically received. I don't think -- we don't know what's going to transpire. So we're just -- we'll deal with it when it comes.

Sure. And then, if you could just give us a sense of the health of your underlying consumer. Obviously, you have a pretty broad portfolio, geographically, but just talk about overall trends you're seeing from underlying consumers in terms of their overall health?

I think probably the best way to approach that is just to look at the numbers we provided in the release. It's on Page 3 of the release. There is a table that shows the change in forecasted net cash flows. This quarter was a positive number, $7.8 million, very small number relative to the amount of cash flows we're forecasting. So I think if you look at that you'd say, well, our forecast was stable and that's probably our best assessment of the health of the borrower.

Sure. And then, looking at that same table in terms of dealer loans versus purchase loans, can you give us a sense of your outlook for -- or the growth opportunities by product? And where are you seeing better growth opportunities and vice versa?

I mean, you can look at the historical numbers. We, obviously, have been growing the purchased loans product more rapidly than the portfolio product. That changes from time-to-time. But, typically, when the environment's tough, we've relied more on that purchase program for growth. And when the environment gets easier, the opposite happens. That's kind of the same trend we're seeing this time.

And our next question comes from the line of Dominick Gabriele with Oppenheimer.

Can you just talk a little bit more about your plans around hiring in 2019? And the plans for maybe an acceleration if possible or reacceleration of the number of dealers that you're looking to acquire? And also what are some of the things that you guys could do in 2019 that could help also reaccelerate the penetration per dealer?

In terms of the hiring plans, I assume you're talking about the sales force there.

Yes, exactly.

We've gone through a pretty rapid increase in the size of the sales force. We're probably in a period now where we're filling in. I think the last time we did a sales force expansion, it was 2011. We grew the sales force pretty rapidly over a -- mostly a 1-year period but followed that with a second year of some growth. It took us about 5 years to fill in that sales force before we got productivity back to where we started. So we're now 2 years and 1 quarter into this expansion. We've probably reached the number that's pretty close to the target number in terms of the maximum number that we want in this expansion, and now we're probably in that 2- to 3-year period where we're trying to fill in and get productivity back to where it was.

And our next question comes from the line of Daniel Staff with Autonomous Research.

Industry report suggest there is a meaningful tale of small Buy Here Pay Here dealerships who appear to lend into a similar borrower segment, many of which also do not have an outside financing partner. Can you talk a little bit about the level of receptivity you see in the field to the credit acceptance value proposition as well as any recurring areas of pushback that you may be getting from these dealers?

Yes, that market has always been a good source of business for us. I think our program has a lot of advantages over a typical Buy Here Pay Here program. Advantages for the consumer in particular because they can reestablish their credit on our program. We report to the credit bureaus. They can move on and get a newer nicer vehicle at a lower interest rate, reestablish their credit, move their life in positive direction. So there's a lot of benefits to our program. Buy Here Pay Here market is large and we've, historically, had pretty good success enrolling those former Buy Here Pay Here dealers in our program. So that hasn't changed. In terms of our success, really, I just focus on the release. Active dealers increase consistent with the trend line, double digits. The issue this quarter and the prior quarter was volume per dealer, but we're having good success signing up dealers. Attrition rates are about equal to the long-term trend, so both those numbers are pretty solid. It's just volume per dealer, which was very strong in the first 6 months of the year has turned the other way in the last 6 months.

And our next question comes from the line of Vincent Caintic with Stephens.

Just wanted to follow up on some questions about the dealers and, broadly, wanted to get a sense of the dealer landscape that you're hearing. So as we're going into calendar 2019, just kind of wondering what are the conversations you're having with the dealers that might have changed versus calendar 2018? And any sort of [sub] things that are resonating with the dealers that are driving your growth?

I mean, I don't really think the value proposition that we offer or the conversations that we're having with the dealers is really, really different. The environment today isn't a whole lot different than it was a year ago. So I think the conversations and the interest and receptivity is the same as it was a year ago.

Okay, got it. So nothing that they're generally worried about or any kind of different features or products that they're looking for that's different?

No.

And our next question comes from the line of Jason Hahn with Principal Global Investments.

Just a couple of quick ones. One, with the K not out yet, is there any update or any commentary you can provide regarding the various ongoing investigations by the state AGs?

Yes. We filed an 8-K this afternoon to provide an update on 2 state matters. The update will be provided in the 10-K, but we wanted to provide the disclosure at the time we release earnings. So that 8-K, it should be out there. It relates to a state matter in the Massachusetts and 1 in Mississippi.

I'll take a look at that. And then, just more, I guess, broadly with the sort of steady increase in average contract size and tenor of the loans outstanding, I'm just curious if you can maybe just qualitatively talk about your confidence in sort of extending your modeling to, I guess, what I would view as sort of an increasingly out of sample type of activity?

Yes, it's not out of sample. So we're not writing any loans today that we haven't written before. And we have a full amortization schedule behind us for any loans, 66 months and shorter. The only ones we don't have a full term behind us on is the 72 months, but we're now up to, I think, 54 months on those, so we're almost through that period and we have a full term behind us on the 66-month loan. So we're not going to change anything in quite a while. We're not writing any loans we haven't written before. So when you see the average contract size move up, it's just an issue of mix. We offer all different terms, all different sizes, all different payments and the dealers and customers select which one they prefer and that drives our mix.

I would add that we've been, I think, while we've been extending loan terms for a long time and we use pilot programs to do that, so when we extend the term 6 months we, obviously, don't know how those are going to perform, but you can make a pretty good estimate based on the performance data you do have and you run a pilot program and you accumulate performance data and you refine your estimate if necessary and once you're comfortable you just roll it out more broadly. So it's a process we followed for many, many years.

And our next question comes from the line of Julio Bologna with BTIG.

Just thinking about the average loan-term in the portfolio. Is there any way of thinking about the difference in the term between the dealer and purchase programs over time?

I mean, we don't disclose them separately, but I will say, at this point, they're not materially different.

That makes a lot of sense. And then, thinking about one of the things that we'll probably find out in the K, is looking at the transfers. It looks like the rate of number of transfers that are happening between the dealer program and the purchase program are increasing on a percentage of the principal on annualized and quarterly basis. Have those continued? Or how should we think about those going forward?

Well, if in our 2017 K, we reported in the fourth quarter of last year an amount of transfers that was significantly higher than the prior periods. We had excluded some disclosure in there that basically said that some of those transfers should have occurred in prior periods. So there was a bit of a catch up there. 2018 transfers have been occurring at a higher rate than early in '17, but not a materially higher rate. So the -- I think the conclusion of higher transfer is just function of the catch up we've had and the new process we put in place following that.

And one last one. Just thinking about the average borrower and have you seen any big change in the borrower or the profile of your average borrower in the last few quarters?

No.

And 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 to talking to you, again, next quarter. Thank you.

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