Credit Acceptance Corp
NASDAQ:CACC
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Credit Acceptance Corp
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Good day, everyone, and welcome to the Credit Acceptance Corporation's Third 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 afternoon and welcome to the Credit Acceptance Corporation's third 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 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 Moshe Orenbuch of Credit Suisse. Your line is now open.
You guys show here that the average volume per active dealer kind of decelerated to minus 3% - of about 6% in Q2 and couple of other metrics that had similar sorts of things. Can you kind of put that in the context of how you’re seeing the competitive environment at this point?
Yes, I think that’s the best number to look at. So we had a few quarters there where volume per dealer improved which was nice to see this quarter obviously went the other way. In the absence of any other explanation for that I think we probably concluded better environment had something to do with it but active dealer growth was strong, attrition was pretty good with volume per dealer was definitely the weak numbers in the quarter.
And is there any way to kind of think about that as we kind of go forward?
Again we've expanded the sales force, we do expect to grow as a result of that. We had three pretty good quarters in a row from a growth perspective last two being better than the prior. This quarter was down a little bit from the from the trend line, volume per dealer was the culprit. Again we don't have any other explanation for other than we expect the competitive environment has something to do with it.
From a standpoint of adoption of CECL I think repeated pretty much the same disclosures last time, has there have been any progress in the work in terms of how things would look from a fair value standpoint?
I mean we're continuing to evaluate, CECL were continuing to evaluate fair value. We didn’t really change our disclosure in the Q because really there's nothing more material to report at this time. We’ll continue to do our work and we have something new to disclose than we will.
Our next question comes from Kyle Joseph of Jefferies. Your line is now open.
Just kind of wanted to get your thoughts on your cost of funds going forward obviously you seen a bit of an increase but nowhere near what we've seen from benchmarks. Can you describe the dynamics going on there? Are you guys seeing spread compression on new deals and give us a sense for your outlook going forward?
Well our cost of funds is up modestly. The reason it's not up as much as benchmarks is that most of the borrowings we have outstanding at the current time are fixed rate. So the impact of increasing rates impacts us as the existing fixed rate deals that are less expensive roll off become a smaller part of our debt and replaced by higher cost financings, that's really what’s accounted for the increase in our cost of funds to date.
In terms of the future, I don't have a unique insight there. The expectation in the market whether you look at the 30-day LIBOR curve or some other index is for rates to increase for the foreseeable future. If those forecasts are correct then our cost of funds will go up if it’s not then the impact on our cost of funds will be more muted. So it’s basically a function what happens to base rates.
And to Moshe's earlier point we can look at volume per active dealer but would you say the increase in benchmarks has had any impact on sort of - on your competitors in loan demand out there?
From the volume per dealer and we have to say no in the third quarter at least whether we'll have an effect going forward who knows but in the third quarter we thought it was a pretty competitive environment.
And then one last one from me just on the improved cash flow outlook on the purchase loans and that’s consistent with recent quarters. I'm just trying to read to through and see if there is anything different there whether it’s a different customer whether you're underwriting those differently or what's driving that improvement?
Yes, I think the best way to look at that number 17.1 million positive variance against close to $8 billion and from discounted forecast the cash flows as if the forecast was very stable for the quarter.
And our next question comes from Dominick Gabriele of Oppenheimer. Your line is now open.
Just wanted to ask about the efficiency ratio this quarter it came in a little better than we were expecting. Could you talk about some of the investments going forward that you may have and/or why some of the efficiency improvement kind of quarter-over-quarter and what we could expect there?
When you're looking at, when you're speaking of efficiency are you looking at the table that we have in the press release, its talk about operating expenses as a percent of adjusted capital?
I was actually looking at, I’m sorry I was looking at the total expenses as a percent of total revenues which seem to be a bit better than we were expecting?
In either way - we have benefited historically from improvements in operating leverage that’s because you have some cost were variable and grow roughly at the rate of the business. Others are more fixed or semi-fixed in nature and grow at a slower rate than the business. So we have benefited from operating expenses or operating leverage over the long period of time as we've grown. We've also got more efficient at certain things we do. So that's really what contributed to that improvement.
And then just on - you mentioned that the competitive environment was kind of strong this quarter. Can you just to talk about what you're seeing from a credit perspective within your borrowing base, so has there been any changes in the behavior of your borrowing base and has that contributed to some of why you've seen a better outlook on your credit book?
Yes, again I think the best measure there is a forecast for every contract we originate. We have a forecast for how that contract will perform. In the press release we show how the contract actually performs relative to our initial estimate, and I think that the message from this quarter and really the last several quarters is that the forecast is very stable.
[Operator Instructions] Our next question comes from Kevin Bruce of Bank of America/Merrill Lynch. Your line is now open.
It's actually Ken Bruce, Kevin is my brother. So my first question is on the consumer loan volume from dealers not active in both period and significant year-over-year growth this quarter as well as last quarter. It looks like it was partly driven by some easier comps from last year's quarters but is there anything that you could talk to that would give us better understanding as to why you're reactivating more inactive dealers at this point?
Yes, I’m not sure that’s what the table says I think if you look at the dealers were reactivating, it’s a pretty small percentage of the total. I think what this reflects is you just have dealers that sort of inconsistently write business. So they write business some quarters and not in others, I wouldn't read too much into that line.
Well I understand on the reactivation side but just in terms of the increased volume is there any increase focus on the part of the sales force that’s may be getting more loans to that from those previously inactive dealers at this point?
I mean like it kind of directionally goes in the same direction as unit volume. I mean last year unit volumes were down 5%. This year there were up 9% so that certainly explains part of it but there is no new initiative that accounts for the number you're seeing.
And are you currently adding to your sales force with current levels of investment into increasing volume?
We've been increasing the size of the sales force now for good couple of years current expansion we are continuing to make investments in it but it's not growing as rapidly as it was 12 months ago for instance.
And maybe just lastly I guess - spreads continue to come in over the last well really several years and you’ve had some good performance just in terms of the increasing level of forecast collections which has been leading to some nice earnings drivers specific on the provision lines. Is there a way to frame effectively how low that spread could go just kind of out of the box from here?
No, we don’t price those specific spread. I think - in the 10-Q there's a little bit more information on the - that would quite look at the average size of the loan, the amount we’re advancing and expected future cash flows. The amount of accretable yield in each loan we write, I would probably point you that if you look and get an idea of what sort of yields we might have going forward.
I have been looking at that but maybe I’ll follow up with Doug just in terms of some other more detail questions around there. Okay, well thank you for your comments this evening.
Thank you. And with no further questions in the queue, I would now like to turn the conference back over to Mr. Busk for any additional or closing remark.
Okay, we 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. You may now disconnect.