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 Third Quarter 2020 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 Chief Treasury Officer, Mr. Doug Busk.
Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation Third Quarter 2020 Earnings Call. As you read our news release posted on the Investor Relations section of our website at ir.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.
Ladies and gentlemen, we are about to start the question-and-answer session. [Operator Instructions] Your first question comes from the line of John Rowan from Janney. Your line is now open.
Good afternoon, guys. Have you guys made any changes to CAPS recently regarding how the unit prices are input into the system?
Not sure what you're referring to specifically. What do you mean?
I mean, are the dealers allowed to - are the prices for the cars in CAPS now linked to the advertisements that the dealers are putting out?
The prices in CAPS come from the dealer. So, for the most part, we get a feed from their DMS that supplies the selling price.
Okay, we haven't made any changes recently to the ability for that dealer to change the price in CAPS.
I don't what you mean, the price of CAPS?
Well, the price of the car when they're submitting the loan application for the client.
No, the feed comes from the DMS, the dealer supplies us with the selling price and CAPS starts with the selling price that the dealer supplies.
Okay. I was little surprised to see the reduction in dealer-partner units. Can you talk a little bit about the reduction in the unit per dealer partner? Obviously, I would have thought competition would have been a little bit weaker this quarter. Maybe just go over the competitive environment and why there is a little decline in the average dealer-partner productivity.
I'll just point you to the reasons that we gave in the release. We had - wholesale prices increased. And that changes the retail price that the dealer has to offer the car for. So our customer at the lower end of the credit spectrum probably gets squeezed out when there's a sharp increase in wholesale prices. But that's only one aspect of it. You have the other things we've mentioned in the release, the stimulus payment and the unemployment benefits.
Okay, thank you very much.
Your next question comes from the line of Moshe Orenbuch from Credit Suisse. Your line is now open.
So maybe just keeping on the same theme, is that - I mean, is that the reason that this started, I guess, before the stimulus payments - while the stimulus payments were still being received by anyone who is unemployed?
When you say this started, what are you…
Well, I'm saying the decline - I guess, the decline in volume, you kind of gave there the monthly volumes. And you saw the biggest declines in the last 4 months started, I guess, in July, while the stimulus payments were still being received?
Yeah, it's partly speculation, and you have, obviously, March and April we're down. May and June responded strongly. July was a bit of a transition month, and then you get 3 weeks or months in a row, the 2 last months, so Q3 and then again in October. So we - and the release, we gave it our best shot at why we think you're seeing the numbers that we're seeing, if you have other theories that's fine as well.
Right. I mean, is there anything that you would think that's happening in the environment that would make that either turnaround or get worse like what do you see as what's going on kind of since then would it require a reduction in wholesale prices? Or are there other strategies that you've got to take care of, not near-term, and the numbers are released through the 28. So we don't have anything beyond that that we know about that we didn't disclose.
But the long-term strategy is to continue to make the culture better and continue to make the product better and over a long period of time that's been successful, so we're not going to change that strategy. And anything that you could talk to that you do in the interim to mitigate that impact? Or does it just kind of roll through?
It depends on what happens. So we will have to see. We've had a long history of growing dealers and growing volumes over a long period of time doesn't happen every quarter, doesn't happen every month, but the long-term trajectory is good. So like I said, we're just going to stick with the same strategy there.
Got it. I guess the - it's likely that at some point in the near future, you'll see some - return of some amount of stimulus. Do you have thoughts us to whether that's enough to qualify the borrowers for the car at these prices? Or just - is it just going to have to wait until used car prices normalize somewhere?
I think both of those things will help. If wholesale values come down, I think, that will help. And I think if they're stimulus that will help as well.
Okay, thanks.
Your next question comes from the line of Kyle Joseph from Jefferies. Your line is now open.
Hey, good afternoon. Thanks for taking my questions. Just know the dealer loan unit volume increased as a percentage of the total originations, is that specifically drove that? And is that a trend you would expect to continue in the current environment?
It was up a couple percentage points, not material change in the grand scheme of things. Don't really have any expectations for whether that trend will continue or not in upcoming quarters.
Got it. And, obviously, credit was very strong this quarter given lower gross charge offs as well as elevated residual values, and not surprisingly, your forecasts and collections improved? I mean, just asked, what sort of macro assumptions are baked into those would there be ongoing stimulus? What's your outlook for residual values going forward?
Yeah. So that question or similar question was asked in the - at the end of the first quarter, if you go back to the transcript of that call, what we told you was that we have our mechanical forecasts that looks at historical data for similar loans, and then forecasts based on historical data. And in Q1, the forecast - the mechanical forecast declined by roughly $40 million.
We then on top of that, given the pandemic added another $160 million, I'm talking about net cash flows here, and reduced overall forecast by the by the total those 2 numbers roughly $200 million. And then, so last quarter, get the same question, what we said is that we haven't changed this subjective part of it, which is that larger number of $160 million. So we are doing it, we're running the mechanical forecast. And then on top of that we have the subjective adjustment, it's meant to consider the macro environment. So again same answer in Q3, we haven't changed anything with respect to the subjective piece. And the positive forecasts change you see in Q3 relates to the mechanical piece.
Got it. Thanks, Brett. Thanks so much for answering my question.
In terms of recovery values, or used car prices, those are a pretty small portion of our overall cash flow stream. So whatever you end up assuming there doesn't really move the needle all that much.
Understood. Thank you.
[Operator Instructions] Your next question comes from the line of Rob Wildhack from Autonomous Research. Your line is now open.
Hi, guys. Just wanted to get some more color on the active dealer count, what was behind the decline there? And what's your outlook from here? Do you think that could return to growth?
So, yeah, I mean, the active count with both elements were soft. This quarter, we saw higher attrition and continue the trend from the prior quarters. We're not signing up as many dealers as we did in prior years. So the active dealer count, it's really a function of those 2 variables.
Okay. Is there anything that you can point to specifically behind the higher attrition rates in the quarter?
It would be speculation, but it would be the same things we listed in the release effect, just like they affect volume overall, they affect the number of active dealers.
Okay, thanks. And then, yeah, that makes sense. And in the past, you've made changes to things like the dealer enrollment fee and salesforce incentives. Can you give us an update on the progress that those changes have made? And are there any other levers you might have to spark some more growth?
Yeah, hopefully, our - again, it gets back to the strategy, that the volume, it reflects some of these macro factors, external factors, but ultimately, it's going to be a function of how valuable we can make our products. And so that's we're focused on doing is if we have a valuable product, and I'm sure that we'll have some growth in the future, and our future success just depends on our ability to continually improve our product.
Okay. Thank you.
Your next question comes from the line of Vincent Caintic from Stephens. Your line is now open.
Hey, thanks for taking my questions. First question on the financing side, you are able to book so understanding that counts are down and maybe competition our used car prices is pressuring you. But if - on the loans or your booking, is there any differences than loans that you were booking previously, your pre-COVID. So thinking, for example, the quality of the customer, the quality of the car, or the stipulations or anything else that might be different?
Well, recent originations have continued a trend of financing a more expensive vehicle for a slightly longer term. So that's a continuation of a trend that's existed for a very long time. We've seen a little bit of change in FICO score, if you look at our disclosure in the 10-Q, you can see that numbers changed a little bit. So the average cycles moved up a bit, but it's not real material, overall. I think the biggest thing is just the continuation of the vehicle term trend that I mentioned.
Okay, got it. Thank you. And notice you didn't buy any stock today, this quarter. And I'm just wondering, with the stock price having get down a little bit, and I'm not sure if any of the - if litigation or anything else kind of keeps you on the sidelines, but if the portfolio is shrinking or demand is flowing? Just sort of wondering, if you could use your capital in other ways, such as buying back your stock or other forms of capital return. Thank you.
I mean, we've certainly bought back a lot of stock over a long period of time, reduced the share count from over 50 million to 17.5 million. So, certainly, historically, we've been opportunistic share purchasers. And I expect that that would continue in the future.
Okay, great. Thank you.
Your next question comes from the line of Moshe Orenbuch from Credit Suisse. Your line is now open.
Great, I just wanted to follow up. You had mentioned that the - you didn't take an overlay adjustment, but that the reversal of the reserve was just looking at the actual performance. I mean, how should we think about, because obviously, most of that period included times in which the borrowers were receiving that stimulus.
You now have more of an extended period of time where they haven't. And how should we think about it either if there is additional stimulus at some point in the future, or if there isn't? I mean, how should we think about that behavior?
Yeah, I think we'll perhaps - we will react to what we see in the portfolio. So, intuitively, if there's more stimulus, that's going to help. But it's hard to book an adjustment based on the size of the stimulus. So we'll just look at the performance of the portfolio. And like I said, the adjustments that we're making to the forecast continues, the one that we put in place in Q1.
At this point, the actual performance has been better than we would have expected when we put that adjustment in place. So if it continues - so the ultimate forecast in collection rates is going to be the same, no matter how we forecast it, right. When you get to the end, that's the number that you're trying to forecast now.
So if things continue in a positive way, then the forecasts will gradually move up over time. If they don't, that's why we have the adjustment in place. And obviously, if they get worse, we'll have to make a larger adjustment.
Okay, thanks.
Your next question comes from the line of Randy Heck from Goodnow Investment. Your line is now open.
Thank you. Brett, I missed the first couple of minutes of the call. So I apologize if this was asked. But have there been pricing changes this year post-COVID or once COVID hit did you tighten pricing? Or since that time, have you made any changes to pricing?
Well, no change to the strategy with respect to pricing. We're trying to optimize the amount of economic profit that we generate. We typically try to stay away from specific discussions about which pricing changes we made and when. Well, you can get a probably a reasonable feel for that if you just look through the disclosures that are in the queue, if we make pricing changes that they show up in the disclosures related to the average loan.
Right. Okay, because I was wondering if that perhaps has had an impact on unit volumes, if there were changes.
And we sort of stay away from specific discussions about pricing strategy.
Yeah, okay. And then, a week or so ago, you announced the largest ABS deal in the company's history of $600 million I think it was at the lowest cost, 1.8%. Was that opportunistic? Or why that large of an ABS deal if your unit volumes have been weaker?
There was an opportunistic element to it. You've got a unique situation in the ABS markets where base rates are very low. And credit spreads are pretty attractive and the combination of the 2 results in, obviously, very low-cost financing. So there is a little bit of an opportunistic element to it.
It was the third deal we've done this year. If you look back at prior years, that's our normal cadence. So, it isn't like we were doing a deal that we historically wouldn't have. What was unique is just the size. Okay.
Okay, thank you. Thanks, Doug. Thanks, Brett.
With no further question on queue I would like to turn the conference back to Mr. Busk, for any additional or 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 concludes today's conference call. We thank you for participation.