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 Fourth Quarter 2017 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 the Credit Acceptance' Senior Vice President and Treasurer, Doug Busk.
Thank you, Andrew. Good afternoon and welcome to the Credit Acceptance Corporation's fourth quarter 2017 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 with Credit Suisse.
I guess I was sort of hoping that you could expand a little bit on the discussion in the press release about the changes in the timing of the receipt of the cash flows in your new estimates? And maybe if you could just relate that to the fact that now you've got kind of negative variances on three years relative to your initial forecast and how we should kind of think about that?
Sure, so two different things we have. As you know, a number of statistical models that we use for forecasting, we use a model not only to run the business but to support our financial statements. One of the model, the timing model which predicts or forecasts the timing of future net cash flows was revived this quarter. So a couple of things we described, kind of the reasons for the revision and the impact and the release, I won't necessarily repeat that, answer any specific questions you have on it but just let me make a couple of points. The first is, it's a timing change so it doesn't change the amount of revenue that we'll recognize in the future for adjusted earnings, and for GAAP it's the same concept, you just have to include the provision for credit losses and as well. So if you look at kind of net revenue or revenue minus the provision in our GAAP statements, including the fourth quarter and going forward, the total amount that we'll recognize is unchanged, the only thing that changes is the timing of when that revenue will be recognized.
Now the second thing I'll highlight is, it's a large estimate, $6.3 billion of undiscounted net cash flows spanning 120 months; so it's a large estimate that covers a long period of time. To forecast the timing, we have to forecast the customer payments including any prepayments, the amount and timing of repossession proceeds, efficiency balance collections and then outflows for portfolio profit and portfolio profit express. So not only is it a large estimate but it's got a lot of moving pieces. Now even though it doesn't impact the amount of revenue, on the loan portfolio going forward it does impact the economics of loans, particularly the longer term loans; so based on our revised model, the longer term loans are less attractive than they were before, the shorter term loans are the opposite. The longer term loans are still very attractive given the price that we paid for them which is less attractive than they were before.
I guess I'm going to have to come back to that because when you talk about, this is level yield accounting and so determining that yield, the factors that determine that yield, the two factors with the total amount of cash and the timing. So if the timing is longer than the yield is lower and that is an ongoing effect, correct?
The yield is lower, you're correct, that's true; but it's also true that the total amount of revenue in our adjusted statements or the net revenue as I referred to it in our GAAP statements is unaffected, it's just the timing of when it's recorded.
I guess I'm missing how the net revenue or GAAP statements can't be lower.
The revenue if you think about is just the inflows that we expect in the future minus the outflows that occurred as a result of us acquiring loans; so the difference between those two numbers is our revenue. We didn't change the amount that we're expecting.
But at any given year it would be lower, wouldn't it?
Well, it would either be lower or higher, so we're saying if the timing changed, so it could work both ways.
This change would mean that in any given year that you're now going to be applying those new standards to it would be lower than it would have been before, correct. That's all, thanks.
Our next question comes from David Scharf with JMP Securities. Your line is now open.
Maybe switching away from the accounting for a moment; you obviously saw a pretty material surge in volume into this quarter and I think an acceleration in the year-over-year growth in active dealers. Can you give us a little bit of a sense of what you're seeing from competitors that's perhaps driving this surge? Any sense that they are easing up or by the same token it looks like you've been continuing to extend the loan term, it was 56 months an average this quarter; is the volume more a function of actions you're taking as opposed to what competitors are doing?
I think it's always difficult to separate those two factors. The best number you can look at in the release I think, if you want to try to get a sense for the competitive environment is the change in volume per dealer, that was up 2.1%, that's a positive change in the trend line there, we've been running negative numbers there for I think seven consecutive quarters. So that's a positive datapoint, it's just one quarter, so I think it's probably a little bit early to running conclusions about the competitive environment based on one datapoint but it is a positive one.
This is a very hypothetical type question; are you willing to venture sort of maybe what some of those volume metrics would have looked like -- had let's say either the average size of the loan remained maybe at levels that we saw earlier in the year or that the average term had remained the same -- trying to get a sense whether those two metrics; number of months and average loan size are more a function of the type of customer, the type of vehicle or if it's in response to the competitive issues?
I can give you thing but I think we've changed our program to make it more attractive offering longer terms, no questions identifies [ph] its impact on volume.
Can you expand a little bit explaining the language in the press release regarding -- I guess the reclassification of some dealer loans into purchase loans. Number one is, is this something that you've historically done in the past but maybe not as a greater degree and for our purposes there are other implications about how the yield is going forward on those loans are going to be treated?
I don't think I would worry about that too much, with the reason we put that in the release. I mean the answer is we do read classified loans from dealer loans, the purchase loans if the dealers don't meet their performance obligation, we're entitled to do that under the terms of the agreement, it's typically small dollars. What happened this quarter is we had a catch up, we haven't been reclassifying those loans in a timely basis, so we caught that up this quarter. The reason it's in the release is an impact to some of the numbers in the collection and spread tables. Also we changed the way we view those tables. This point forward the tables will reflect the way the loan was initially recorded and that will just allow us to keep those numbers consistent overtime. So we highlighted it in case you have a record somewhere; what was in prior releases you won't be wondering why they didn't tie out.
Lastly, anything in the fourth quarter to report from the hurricanes, any residual impact and so forth that we might take note off?
No.
Our next question comes from John Rowan with Janney. Your line is now open.
I'm trying to tie together a few comments that you made. So duration is up 56 months from 55 last quarter but you're also talking about the economics of the loan being substantially less attractive on the longer term loans versus the shorter loans but you're still increasing duration from -- I guess, due to our competitive standpoint. Is there any impact on the dealer partners as far as your advanced rate or hold back that impacting there and our desire to push loans onto the credit acceptance platform based on the changes that you're making to the collection patterns?
I don't think the changes are big enough that the dealers would notice. I mean if our new forecast is active, I mean the cash flows will come in a bit later but I don't think an individual dealer would notice the difference.
If you took loan A, give us an idea of how much longer the collection period is; I mean is it 10 months additional, 5 months or 20 months, I'm just curious to know how much longer the collection period lasts to get you to the same forecasted collections?
You're talking about a very small difference when you're thinking about in those terms, so it's a 1% to 2% type adjustment in that 20%, 30%, 40%.
You talked about a holdback forfeiture in the press release; was there any gain reported from holdback forfeitures?
No, it's taken overtime. We just account for that loan as a purchase loan going forward.
Any impacts from the changes in the sales force you guys have made over the past year; any impact -- is that driving the higher dealer partner productivity numbers?
Yes, we're starting to see some positive momentum there, it's early but seeing a nice progression, we started expanding the sales force mid-2016, the group that we hired sort of the last six months of 2016 grew faster than our overall average this quarter, the group we hired during the first six months of 2017 also grew faster than the overall average, they didn't grow as fast as the first group but still higher than average, so we're starting to see a nice progression. Another ones we hired in the last six months of 2017 grew slower than our average, so some positive change there, the average size of the sales force in Q4 was up I think 27% over the prior year same period. Unit volume was up just short of 11%, you'd like to see unit volume growing faster than the size of the sales force, we're not quite there yet but we're seeing -- like I said, some small move to the right direction.
Two more quick questions; repurchases, any plans there? It doesn't seem like you repurchased any stock this quarter?
We didn't buyback any stock this quarter and we'll continue to think about it the same way going forward. We've bought back a lot of stock overtime though the repurchase patterns has been lumpy and they will likely be lumpy in the future.
Last question; we don't have [indiscernible] so I was wondering if there is going to be any changes to the regulation or contingent liability section?
I mean we'll release the 10-K and another a week 10-days or so; so we can talk about it at that time.
Our next question comes from Vincent [ph] with Stephens. Your line is now open.
Just wanted to get the practical drivers of maybe some of the questions that were asked. So on the provisioning and the timing adjustment before the provisioning, is there maybe something that would drive that from the customer perspective, so I'm just thinking of big potential example of maybe you're doing more workouts with your customers where you might restructure some of the loans and that would drive a timing change; I'm just trying to think of examples of what would cause our timing to be different than to be -- for the provision to be higher?
As I mentioned, it's a large complex estimate covering a long period of time, lots of moving parts, it was a very small adjustment in the scheme of things to a large number. We highlighted the most important thing that changed which was our estimate for the longer term loans. When we built the model, we had less than a full dataset for those longer term loans, we now have more data which we used for data estimate and attempt to make it more precise.
And then for the forfeiture of the dealer holdback, could you maybe just give us a background on the types of performance obligations the dealers have been meeting; so what would cause the forfeiture of the holdback?
The simplest one is they have to do 100 loans in order to be eligible for the dealer holdback, so if they close their first two loans which is -- they have to get to 100 to close it, if they don't make it to that 100 milestone then we're entitled to retain the dealer holdback. So that's what that is.
So would there be a mix of relatively new dealers that would be under this forfeiture?
All dealers that hadn't got to 100 would be included in that.
Any updates on competition that you're seeing in an environment we're hearing maybe some folks pulling back or maybe other folks getting more competitive and just what's your sense?
We're not allowed to add to what we said already. I don't see a big change in the environment at this point. As I said, we had one positive datapoint for the quarter which was the increase in volume for dealer but I think it's just one datapoint.
Our next question comes from Jack Micenko with SIG. Your line is now open.
Looking at the positive variance that continues in '17 and I guess particular in the purchase loan portfolio; I guess my question is, is that -- are you seeing better on new writing and better quality in the purchase book or is that more a function of going in -- your estimate might have been maybe more severe than actual or some combination of -- just trying to get a sense of why the purchase numbers keep driving some better positive areas overall in recent quarters?
I think the best way to think about loan performances, the number that we provide that shows you the change in our net cash flow forecast for the quarter, $13.7 million, so it's a positive number which is nice but that's again $6.3 billion of undiscounted net cash flow. So $13.7 divided by $6.3 billion is a number that's pretty close to zero, I think most reasonable conclusion to draw from that is the loan performance was stable for the quarter and it's been stable for the last several quarters; that's good news but I don't think there is really a lot more you can say about changes in forecasted collection rate because it's just didn't change that much.
I think back in June there was -- see if you've reached out [indiscernible]; is there any update on the status of that?
No update at this time, we'll file our case as Doug said in short period of time and you can look for any updates in there.
Our next question comes from Jason Han [ph] with Principal Global Investors. Your line is now open.
As we think about the performance of the business going forward, how should we think about provision expense as a percentage of the loan book or net revenues? Is it -- it was the fourth quarter provision a bit of a catch up or is this something we should be viewing as more of a normalized level of provision?
I think the best way to think about the provision for credit losses is to focus on the adjusted results. Where there is no provision for credit losses, that's the way that we think about it internally; on the provision we've talked about it at prior calls, we've described why we think that makes it difficult to assess the economics of the business and there is less than written on that, so I'll just refer you to that.
We do say in the press release on Page 3, we talk about the impact of the revision on both the GAAP and adjusted yields. The impact on the GAAP yield was 90 basis points, on the adjusted yield was 140 basis points.
Our next question comes from Daniel Smith with Tetant [ph] Capital. Your line is now open.
Do you feel like loan durations have kind of reached a limit or is it just that you think that you should be paying a little bit lower advanced rate against the long duration stuff?
The advanced rate we paid during the quarter is the advanced rate we thought was optimal otherwise -- with right loan terms from 24 months out to 72 in the average initial loan term that's in the press release is just a function of the mix. So we're happy to write 72 month loans, we're happy to write 24 month loans, it's whatever the dealer and the customer desire.
So the loans that you purchased in Q4 was that with knowledge of the later collection timing?
I mean it both happened at the same time but we brought the loans during Q4 and we revised our timing during Q4, so there was some overlap there but it was a period where our knowledge was somewhat fluid.
So going forward you don't feel any differently towards 72 months loans or potentially longer duration in the future, it's just that all else equal your advance rate should be a little lower and probably volumes a little bit lower?
Yes, correct. We'll take what we learned from the revision and we'll apply that to future pricing.
But going out -- I mean looking out a couple of years, do you see duration continuing to increase or do you feel like it's kind of reached a limit?
I think it's impossible to forecast what the average [indiscernible] would be two years from now but like I said, we're happy to write 72 months loans, we're happy to write 24 and whatever the mix is, it just really depends on what the opportunities are in the market and what the dealers and customers desire.
In the next year or so do you see yourself going out beyond 72 months on any loans or I don't know how you normally test these things?
We don't have any plans right now to go beyond 72.
In the next year do you have a plan to like increase some mix like 72 months loans?
I think I covered that. I don't know how to answer it any other way than I just did. So let's just move on.
Our next question comes from Clifford [ph] with CAS Investment Partners. Your line is now open.
My question is, I recognized that the change in your timing model adjusted the yield on an adjusted basis by 1.4% in the quarter. If I were to able to look at just the forecasted levelized deals of new originations, by how much would this change in forecasted timing of longer duration loans impact that yield?
Pretty close to the same number.
So there is no sense that a loan that was originated a couple of years ago where you've been collecting the revenue at the old -- sort of forecasting revenue at the old schedule so to speak would have a larger variance if the change in timing was done only in the back half of the loan?
You lost me there.
So you've originated a $100 loan two years ago and you've been recognizing revenue according to the levelized yield that you forecasted at that time and with savings on exactly according to plan there will be some smaller principal balance outstanding today but this timing difference would then be added and so in theory the changes in timing would be sort of recognized over shorter amount of remaining time and a smaller principal balance and so in theory we drive [ph].
I follow you close. So I think the piece there to fill in the blank is, the old timing model it adjusts overtime so as the loan ages, if our timing is lost, the yield gradually adjusts overtime. So it's not like everything has fell off a cliff, the loans were gradually adjusting overtime and what this revision does is so to anticipate that going forward rather than letting it occur overtime.
Roughly when you talk about longer term loans having a slightly longer duration, I realize that all the loans had some adjustment to their duration. But roughly what portion of your balances are you thinking of as the longer term portion which – whose levelized yields they are going to be lower in accounts of the 1.4% overall change?
So the 72 month loans is where we have the least amount of data. 72 month loans are at 12% of our forecast at the end of '17. 66 month loans, we have quite a bit of data on those, we don't quite have full 66 months of data but we're close. And 66 month loans are about 26% of the overall forecast, so you have those two components together where we have the largest changes.
[Operator Instructions] We do have a follow-up question from David Scharf with JMP Securities. Your line is now open.
I think my question was asked in one fashion or another. I guess, Doug I was trying to get it as I think about forecasting the level yields going forward and on a GAAP basis given the 90 basis point correction, I was just trying to get a sense for how much of that is arguably captured in the Q3 to the Q4 kind of simple average yield that's calculated or should we be taking the finance charge and in Q4 divided by the average balances a yield and then reducing that by a full 90 basis points going forward?
No, take the actual yield for Q4 and use that as your starting point going forward.
So the allowance charge to hit the provision is captured in that full yield adjustment in the quarter. Thank you very much.
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 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. We thank you for your participation.