Credit Acceptance Corp

NASDAQ:CACC

Earnings Call Transcript 2019-Q4

[Operator]

Good day, everyone and welcome to the Credit Acceptance Corporation Fourth Quarter 2019 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.

[Doug Busk, Senior Vice President and Treasurer]

Thank you. Good afternoon and welcome to the Credit Acceptance Corporation Fourth Quarter 2019 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 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]

[Operator Instructions] And our first question comes from the line of Moshe Orenbuch from Credit Suisse. Your line is now open.

[Moshe Orenbuch, Credit Suisse]

Great. Thanks. I was hoping you could, Doug, you could talk a little bit about the market in the fourth quarter because it just feels like, you know, you had a pretty significant -- again deceleration and you know, I know you called out the October numbers last quarter, but that seems to have continued. The volume has kind of come down 25 to 30% over the last 18 months. And then it also just feels like, the -- your estimates were kind of up through the nine months of the year, but then kind of down in terms of cash flows in the fourth quarter, you know, for each of the last three years. So, can you just talk about what's going on that would drive that and I've got a follow up also. Thanks.

[Doug Busk, Senior Vice President and Treasurer]

With respect to the cash flow forecast down 17.7 million for the quarter, even though it's a down quarter, it's still a pretty small number. We're up for the year given the magnitude of the cash flows that we're trying to forecast about 9 billion, 17 million is a pretty small number. So it's a negative data point, but a very small one and not one I'm too concerned about. With respect to the volume -- we're obviously trying to grow the business. So from that perspective, it didn't meet our objective during the quarter. But I think if you break down the numbers in the quarter, volumes per dealer was down year-over-year, but sequentially pretty close to what you might guess if you just looked at the history, probably the only number, iteration again, what you might expect given the history. The only number that was maybe different than the trend line was the new dealer signups. Again, if you look at the history there, you'd probably expect new dealers to be somewhere in the 900 to a 1000 range. And it was less than that.

[Moshe Orenbuch, Credit Suisse]

Any thoughts about what that might mean? I mean, three months ago you did a -- kind of liberalized some of the standards for taking new dealers.

[Doug Busk, Senior Vice President and Treasurer]

Yeah. I don't know if we liberalized the standards. We changed the enrollment fee. What we saw during the quarter is our field sales force gave us feedback that they have standards that they have to meet for a new dealer enrollments. They thought those standards were too harsh. They thought it was causing to spend more time enrolling dealers, when they would like more discretion to spend their time with the existing dealers. So we relaxed those standards. We immediately saw a reduction in new dealer enrollments and whether that change or payoff long term, we don't know at this stage.

[Moshe Orenbuch, Credit Suisse]

Gotcha. My follow up question really is, you know, this is the fourth quarter of the year, we don't get the 10-Q along with earnings. I mean are there disclosures that we would have gotten, either as to CECL updates? And what you might be doing come first quarter in terms of the way you're going to report under CECL or any other relevant disclosures that we would have had from that filing?

[Brett Roberts, Chief Executive Officer]

Again, we'll provide estimated financial impact on our 10-K, which will be filed in fairly short order. As of now we don't expect to make any material changes to the estimates that we provided in Q3.

[Moshe Orenbuch, Credit Suisse]

Okay. Thanks.

[Operator]

Thank you, our next question comes from the line of John Hecht from Jefferies. Your line is now open.

[John Hecht, Jefferies]

Thanks guys. Just going a little bit more to the dealership activity. You cited that there's the net, the net loss, which was a little bit off trendline this quarter. Looking back we've seen certain second quarters and fourth quarters, so there has been a net reduction. I'm wondering is there anything seasonal with respect to kind of the selling process, and that we should be thinking about? And kind of just your color on the dealership channel, if you would kind of hit your potential target market share. Is there still a lot of opportunity for you to grow and what are kind of trends in that environment?

[Brett Roberts, Chief Executive Officer]

When you refer to net loss, what are you talking about?

[John Hecht, Jefferies]

Your net dealers.

[Brett Roberts, Chief Executive Officer]

Or just the number of dealers in the quarter versus the sequential quarter?

[John Hecht, Jefferies]

Correct.

[Brett Roberts, Chief Executive Officer]

Yeah, I think the two big components there are attrition and new dealer signups. I think attrition was in line with -- if you look at the history of fourth quarters, the attrition we reported was pretty much in the range of what you've seen historically, maybe a little better than what you might expect. The number that was off was the new dealer enrollments, which I just talked about.

[John Hecht, Jefferies]

Do you, is there any thoughts on what the -- how big the market is and how much you've penetrated in that regard?

[Brett Roberts, Chief Executive Officer]

There's a awful lot of dealers out there, you know, 60,000 - 80,000 dealers depending on what database you use. Just like there is turnover in our dealer base, there's turnover in that dealer base. Generally as dealers are, you know, bought, sold, handed down to kids, new GM, et cetera. So it's really tough to say what the total addressable market is. So I mean we think there's a lot of room, but obviously the recent trend line isn't very encouraging.

[John Hecht, Jefferies]

Okay. Thank you. And then, last question is -- just looking at the spread trends, obviously over the course of the last eight or nine years, and you know, certainly it's been a changing competitive market and deeper in the economic cycle. But I'm wondering, is part of the spread contraction tied to duration or anything. And maybe can you give us any color and what would change? What would change in the market to why you do see an increase in spread?

[Brett Roberts, Chief Executive Officer]

It's a very competitive market, no question about that. We've said that in prior quarters. That continued to be the case in this quarter. We've also referred in prior quarters that we don't price by spread. I think if you look at the 10-K or even the last 10-Q, there's some pretty good information in there on the economics of the loans that we're originating. So I would probably just refer you to that and the spread table, some we've had in there for many years, our lenders like to see it. So we've continued to include it. But I think really the more relevant information is in the Q and the K. From that perspective we're pretty happy with the economics of the business we're writing. We just like to write a little bit more of it.

[John Hecht, Jefferies]

Okay, great. Thanks very much.

[Operator]

Thank you, our next question comes from the line of Vincent Caintic from Stephens, your line is now open.

[Vincent Caintic, Stephens]

Hey, thank you. Good afternoon. Just kind of a follow up for the same, similar topic. So looking at the unit volume and the dollar volume of that trajectory downward, just when you're thinking about 2020, do you expect more of the same? Are there, changes or maybe this month you've seen an inflection to the upside and maybe is this trend a --so is it just competition as a cyclical thing or is it -- is it a secular thing that's a cyclical event or maybe late stage or is there something else to it? Thank you.

[Brett Roberts, Chief Executive Officer]

We’ve been in a very-very competitive period for a long time, really, since late 2011-2012. It appears that the competitive environment has gotten more intense recently. In terms of 2020, we don't have the ability to forecast what the competitive environment is going to be any better than anyone else. So I really can't provide you with an answer to your question on, on what we see.

[Vincent Caintic, Stephens]

Okay. Got it. I guess, maybe compared to what you've seen in the past in intense competitive cycles, but maybe in an environment where, I don't know if car sales are slowing, if used car prices are declining. What have you -- any historical takeaways that you could point to?

[Brett Roberts, Chief Executive Officer]

Typically, the market turns when there's some interruption in the supply of capital. But you know, we haven't been through, we've been through a few cycles, but the cycles take a long time to play out. So we don't have a tremendous number of data points to look at but historically that's been the case where the capital supply gets interrupted and that's what changes the market dynamics. So, we'll see if that's the same thing this time.

[Vincent Caintic, Stephens]

Okay. Got you. So if that's the case, I guess, is the, the applications, I guess the applications or the funnel is coming in, but you're kind of not seeing the economics of this applications compared to whoever else is winning a deal, it's just the economics are being eroded? Or is it that that the applications are declining or, or a mix of both?

[Brett Roberts, Chief Executive Officer]

I think we're as we said a minute ago, we're pretty happy with the economics of the profit per unit part of the equation. We just like to figure out how to grow the business little bit better than we have been.

[Vincent Caintic, Stephens]

Okay, got it. Thanks so much for the help.

[Operator]

Thank you. Our next question comes from the line of Arjun Tuteja from Jarislowsky Fraser.

Your line is now open.

[Arjun Tuteja, Jarislowsky Fraser]

Hey, Brett, I have a high-level question on work culture, so Credit Acceptance is featured as top hundred companies to work for pretty regularly. So going back in history, can you talk a little bit about, the steps you had to take to get there? I'm curious because a lot of your employees are likely dealing with consumers and financial stress. So I'm curious, how do you create a positive work environment in such circumstances?

[Brett Roberts, Chief Executive Officer]

That's a good question. It took us a long time. We started to focus on it many, many years ago. I think, you know, we spent a lot of time communicating, do town hall meetings every quarter. I meet with every team member, every quarter that they can ask me a question online, I'll answer it in writing and post it for everyone to see. We do -- I do lots of round tables where I sit with team members and we discuss the business. Other leaders do that as well. We do quarterly surveys, so we put a lot of emphasis on the communication process. I think hiring is a big part of it. You got to bring the right people into your organization, you know, consistent with our core values that we've articulated and those are some of the big things. You got to have the right people. It's not one thing, but it's been a journey over a long period of time. I think the framework that the Great Place to Work Organization uses is a pretty good one that talks about trust, pride, camaraderie and so I would encourage you, if you're, if you're looking to move in that direction to just embrace that framework and do all the things that they tell you to do.

[Arjun Tuteja, Jarislowsky Fraser]

And when you talk about communication, are you saying that employees feel more valued when they are listened to? Is that's what you're trying to say there?

[Brett Roberts, Chief Executive Officer]

Yeah. No question. And I think in addition to listening, maybe this is obvious, but we get a tremendous amount of feedback from team members from a variety of channels.

I think the important thing is, we respond to that feedback. So, you know, we ask them, we tell them we need more information, we state what our position is, or we take action and then we report out what we've done. So I think that makes employees feel like they're listened to and makes employees feel like they're empowered.

[Arjun Tuteja, Jarislowsky Fraser]

Okay. Okay. I have one more on your sales team. So you hired quite a lot of sales people over the last three years, so have they all ramped up to what you would call a steady state productivity or do you still see some improvement for some productivity there?

[Brett Roberts, Chief Executive Officer]

Yeah, it's a work in process. I think at this point, how we ramped it up pretty quickly. I think the market in my opinion has gotten more difficult, which makes it a little bit tougher to see whether you're on track. But I’ve said this we still have some work to do to get to productivity where we'd like it to be.

[Arjun Tuteja, Jarislowsky Fraser]

Okay, thank you.

[Operator]

Thank you, our next question comes from the line of Benjamin Weinger from 3 Sigma Value, your line is now open.

[Benjamin Weinger, 3 Sigma Value]

Hi, thanks. You said on the last call that there's going to be, there's no change to the economics of the business because of CECL, but you're grossing up the value of your loans, so there'll be more assets. So you'll have a bigger balance sheet generating the same level of cash flows. So, your return on assets will decline. Is that not correct?

[Doug Busk, Senior Vice President and Treasurer]

No. Your net asset will be unchanged. And for the existing book, your net asset will be unchanged until that portfolio runs off. For the new loans, your assets will actually be lower. The larger point is you don't change the economics of the business by accounting for it differently.

[Benjamin Weinger, 3 Sigma Value]

What I'm saying is that your balance sheet is larger now. There’s more assets on your balance sheet…

[Doug Busk, Senior Vice President and Treasurer]

A second thing you’re wrong about. which is, that accounting doesn't drive economics, so you're, you're wrong on both points.

[Benjamin Weinger, 3 Sigma Value]

So you're not going to have a larger balance sheet because of CECL?

[Doug Busk, Senior Vice President and Treasurer]

Correct.

[Benjamin Weinger, 3 Sigma Value]

Okay. And also just confirm that there'll be no decrease in your book value upon CECL adoption.

[Doug Busk, Senior Vice President and Treasurer]

Correct.

[Benjamin Weinger, 3 Sigma Value]

Okay. Thank you.

[Operator]

[Operator Instructions] Our next question comes from the line of Giuliano Bologna from BTIG, your line is now open.

[Giuliano Bologna, BTIG]

Good afternoon. I guess jumping into kind of a little more of a high level question, but since you've taken out the enrollment fee from the business, have you seen any real change in dealer signups or the pace of dealer signups since then?

[Brett Roberts, Chief Executive Officer]

I think the numbers for the quarter sort of answer that question. New dealer signups were, as I mentioned were lower than the trend line. We had 753 new active dealers this quarter, 951 a quarter before, over a thousand in the second quarter. So if you look at that trend line, there was a fall off in Q4 and I went through what I thought the reasons for that were.

[Giuliano Bologna, BTIG]

Then a slightly different question, looks like there were a couple of revisions to the forecast of cash flows, looks like '18 vintage came down about 30 bips and then the '19 vintage came down 20 bips. And it seems like it's the first time since call it the first quarter of '18 that the dealer loan portfolio is at an a negative revision, with the purchase loan I should say. Is there anything specific driving that, is it collections, is it recoveries on repossessions or anything specific driving those numbers?

[Doug Busk, Senior Vice President and Treasurer]

The revisions, again as Brett mentioned earlier, are very small in the context of the 9 billion in net cash flows we're trying to forecast and there wasn't any one factor that accounted for the majority of the change.

[Giuliano Bologna, BTIG]

That sounds good. The only other thing to have a look at is when you look at your expenses, obviously you had a ramp up on the sales force side in terms of increasing your expense base. Is there anything that would continue to drive the expense base higher at the same rate? Or should we expect the expense base to the taper off as originations come down?

[Doug Busk, Senior Vice President and Treasurer]

I mean, I think, part of it is just dependent on the level of growth from the business and part of it's just dependent on the investments that we think we need to make in the business that aren't directly correlated with immediate growth. So, tough to, like I said earlier, tough to predict the growth rate and the investments in the business have historically been lumpy and I would expect that they'd continue to be in the future.

[Giuliano Bologna, BTIG]

Got it. Thank you and thanks for taking my questions.

[Operator]

Thank you. 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.

[Doug Busk, Senior Vice President and Treasurer]

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 [e-mail]. We look forward to talking to you again next quarter. Thank you.

[Operator]

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