AmeriCredit Corp. F3Q09 (Qtr End 03/31/09) Earnings Call Transcript

AmeriCredit Corp. (ACF)

Q3 2009 Earnings Call

April 23, 2009 5:30 pm ET

Executives

Caitlin DeYoung – VP IR

Daniel Berce – President & CEO

Chris Choate - CFO

Analysts

John Hecht – JMP Securities

Moshe Orenbuch – Credit Suisse

Jordan Hymowitz – Philadelphia Financial

Phillip Austern – Valinor Management

Samuel Crawford – Stone Harbor

David Rainy – AKRE Capital

Presentation

Operator

Good afternoon, at this time I would like to welcome everyone to the AmeriCredit third quarter fiscal year 2009 earnings conference call. (Operator Instructions) I will now turn the call over to Caitlin DeYoung, Vice President of Investor Relations; please go ahead.

Caitlin DeYoung

Good afternoon and welcome to AmeriCredit’s third quarter 2009 earnings conference call. With me today for the prepared remarks are Daniel Berce, President and CEO, and Chris Choate, Chief Financial Officer. Also joining us is Steven Bowman, Chief Credit and Risk Officer.

Before we proceed I must remind everyone that the topics we will discuss during today’s call will include forward-looking information that involves risk and uncertainties detailed in the company’s filings and reports with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the year ended June 30, 2008.

Forward-looking statements are based on the beliefs of the company’s management, as well as assumptions made by and information currently available to the company’s management. Actual results and events may differ materially. We will be posting a transcript of the prepared remarks to our website shortly after today’s call.

I will now turn the call over to Daniel Berce.

Daniel Berce

Thank you Caitlin, we had a productive and successful March quarter. We earned $10 million or $0.07 per share in the third quarter of fiscal 2009. In early March we amended and extended our master warehouse credit facility which allowed us to address our warehouse covenants and solidify our funding platform.

With the warehouse amendments in place we will not need to access the capital markets again until the first half of calendar year 2010 when conditions will hopefully be better. On the credit side, despite ongoing economic weakness we experienced notable seasonal improvement in our portfolio credit performance.

We also continued to build our allowance for loan losses to further strengthen our balance sheet. In our prepared remarks today I will go over key portfolio credit performance metrics for the March quarter, our outlook for future credit performance, and the status of loan origination activities.

Chris will then provide you with an update on our funding and liquidity positions. Now starting with credit, credit results for the March quarter reflected seasonal improvements, resulting from typical use by our customers of their tax refunds to catch up on their loan payments.

Thirty-one to 60 delinquency decreased sequentially to 6% at March 31 from 7.8% at December 31, 2008. In greater then 60 days delinquent accounts, decreased to 3% from 4.2% last quarter. Annualized net credit losses for the quarter were 7.8%, down from 9.5% for the December quarter.

Despite the seasonal improvement overall credit performance continues to be pressured by the high level of unemployment and economic strain on our customer base and credit metrics remain elevated compared to the prior year. As we mentioned in our earnings conference call last quarter we are continuing to utilize deferments to help our customers navigate this economic downturn and maximize the ultimate collections from our portfolio.

During the quarter we granted deferments to approximately 8% of accounts outstanding. Our recovery rate on repossessed collateral was 39% for the March quarter compared to 37.1% in the December, 2008 quarter.

Used vehicle values have firmed over the last several months as the supply of used cars decreased due to fewer trade ins related to lower levels of new car sales. We expect that used vehicle pricing will remain stable at its current level through calendar 2009 subject to historical seasonal patterns.

Looking ahead our portfolio credit metrics will continue to be significantly pressured because of the decline in our portfolio size from approximately $12 billion at the end of March to approximately $90 billion by December 31, 2009.

We expect credit performance to reflect historical seasonal trend with annualized losses improving in the June quarter before weakening in the September and December quarters. Now moving on to originations, we originated $210 million of loans during the quarter, down from $321 million for the December, 2008 quarter.

We expect current loan production to be some of the most profitable in our history despite higher funding costs. The favorable competitive environment has allowed us to remain selective on the applications we approve and more tightly manage loan structures. Early credit performance on our post March, 2008 vintages continue to trend considerably better then our 2006 and 2007 vintages.

We have also continued to increase loan pricing. Our originations for the March quarter carried an average APR of 17.3%, up from 17.1% for the December quarter. Additionally the fees we received from dealers increased to 2.1% for the March quarter, up from 1.3% for the December quarter.

Going forward we will continue to balance our need to conserve liquidity with our level of new loan production. We are targeting approximately $200 million to $250 million per quarter in originations for the foreseeable future. We believe that our current origination platform is scalable so that new loan production levels can be increased without incurring significant incremental cost when economic and capital conditions are more favorable.

I will now turn the call over to Chris Choate, to discuss our balance sheet and capital and liquidity position.

Chris Choate

Thanks Daniel, for the March quarter we earned $10 million or $0.07 per share. Included in this quarter’s results are a few items that I would like to highlight. First, we recorded a provision for loan losses of $235 million to increase our allowance for loan losses 60 basis points to 7.7% of ending finance receivables.

As Daniel noted earlier although we did see seasonal improvements in credit performance this quarter, we expect economic weakness to continue to pressure our portfolio especially in the seasonally weaker second half of the calendar year.

Second, we used approximately $10 million to retire $25 million of convertible notes and recorded a $14 million gain on this debt retirement.

And third, we recorded a restructuring charge of $8 million for the closing of certain credit centers and an associated reduction in staffing in our originations and support functions that we discussed during our January earnings conference call.

Now turning to funding and the capital markets, in early March we successfully amended and extended our master warehouse facility. This amendment lifted the maximum rolling six month annualized portfolio net loss ratio and removed the 364-day aging limitation on pledged receivables.

The amendment also reduced the size of the facility to $1.1 billion and increased our fully funded cost of funds by approximately 700 basis points. Additionally the advance rate was decreased immediately to 80% and is scheduled to continue declining to the upper 60% range by February, 2010.

As a last point regarding funding we do not expect to directly benefit from the TALF program as it currently exists since the program does not provide funding for AA and A rated securitization bonds. In our typical securitization structure approximately 25% of the bonds we issue would be AA and A rated and would not quality for TALF.

We are hopeful that TALF will ultimately be expanded to include eligible securities below AAA, at which point we may look to bring a securitization to market.

Now turning to liquidity, at March 31, we had $409 million of liquidity consisting of $121 million of unrestricted cash and approximately $288 million of available borrowing capacity on unpledged eligible receivables at the end of the quarter.

We used approximately $71 million to pay off our Canadian warehouse facility during the quarter. Looking ahead we expect to maintain sufficient liquidity to support our current scale of operations. Embedded in our liquidity forecast is the expectation that we will fully pay off the $93 million outstanding balance of our leasing facility when it comes due in June.

We also expect that as we head into the seasonally weaker second half of the calendar year, we will [breach] certain performance triggers in our 2006 and 2007 securitization trusts and trap cash to build to a higher credit enhancement level.

On a positive note, we have approximately $200 million of recoverable income taxes which we expect to receive by mid fiscal year 2010 resulting mainly from federal net loss carry backs.

Finally a few statistics, shareholders equity at quarter end totaled $2,014 billion, up from $1,978 billion at December 31. Book value per share increased to $15.17 at March 31.

I’ll now turn the call back over to Daniel for some closing remarks.

Daniel Berce

Thanks Chris, over the past year and a half as the economy weakened and access to the capital markets became limited, we took timely steps to preserve liquidity, strengthen our balance sheet, and adjust our operating model to whether the downturn.

The amendment and extension of our master warehouse facility solidifies our funding platform and allows us to continue to execute our origination plan without having to access the securitization market until the first half of calendar year 2010.

During the March quarter we strengthened our balance sheet by reducing leverage to 5.9x managed assets to equity from 6.6x at December 31, 2008 and increasing our allowance for losses to 7.7%, all the while protecting book value.

Our intense focus on maximizing the cash collected from our portfolio along with improved wholesale recovery values is reflected in our seasonally strong credit metrics for this quarter. While we do not anticipate economic conditions to improve in calendar 2009, we have positioned our business to withstand the economic cycle and take advantage of more favorable conditions in the future.

I’ll now turn the call over for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of John Hecht – JMP Securities

John Hecht – JMP Securities

Congratulations on a I guess a successful quarter in many ways, first question, it looked like you had a pretty high tax provision rate, I’m wondering what derived that.

Chris Choate

Our normal tax rate is going to be 37% to 38%, but in any quarter we’re going to have some sort of routine normal adjustments to valuations and so on, that if we have a higher amount of pre-tax earnings really don’t reflect, you don’t really see them.

This quarter we had those routine kind of mostly state level valuation adjustments and because pre-tax income was modest, those really added up to make the tax rate sort of abnormally high.

John Hecht – JMP Securities

And only because I’ve never seen this any more, maybe you guys are blazing in the trails of new accounting definitions, is weighted average and assumed incremental shares the same as fully diluted shares?

Chris Choate

Yes.

John Hecht – JMP Securities

The third question is, you highlighted you’re comfortable with your current cash balance and you talked about paying off the Canadian facility in the coming months, maybe can you step us through kind of sources and uses of cash over the next couple of quarters. I know that you did have kind of a working capital drain on cash flows and a funding drain this quarter, but maybe can you highlight the primary components of that over the next few quarters.

Chris Choate

Yes, the primary components really are as the portfolio continues to amortize down we have a pretty significant amount, say 10% to 15% of credit enhancement being released as the portfolio plays down. Its going to go from $12 billion now to $9 billion by the end of the calendar year. That’s going to release a pretty significant amount of cash.

John Hecht – JMP Securities

And that 10% to 15% is what dollar level.

Chris Choate

Well 10% to 15%, maybe slightly higher of that $3 billion runoff. Over time its obviously that’s not all in a month, that’s for the next nine months. That’s really one of the key adds to liquidity. Obviously the uses are new loan originations at the lower level we are at, even with the higher enhancement we’re having to deck against those loan originations on the amended warehouse lines, that’s not as significant a drain.

The facility that we’re paying off actually in the coming months is our leased facility, the Canadian facility we paid off during the March quarter.

John Hecht – JMP Securities

And then the last question relates to your comments on TALF in that maybe the lack of certainty being able to access it because of the inability to attract some of the buyers of the subordinated classes, I’m wondering with your discussions with bankers on this topic, are they trying to find maybe negotiated transactions under the structure TALF where you might be able to get someone that would buy multiple classes. It talked to investors that seemed to be interested in the blended returns from TALF and I’m wondering if you have any commentary on that.

Chris Choate

We’ve had many conversations not only with bankers but with potentially interested investors and it certainly could come about that there’s a transaction that comes together. At this point the expectation on the investor side for the sort of unlevered return on the subordinated bonds just doesn’t match what we feel like we’re in a position to offer and still make a transaction profitable.

That’s not to say that there couldn’t be something come together that would give us the blended rate we’re looking for and as I noted in my comments, there’s sort of some ongoing dialogue in the industry and at the government level about expanding TALF down to AA, A which would potentially allow an investor to come in with a lower unlevered return and leverage that out through the TALF program and give us what we need on a funding cost. So yes, there’s a lot of dialogue.

Operator

Your next question comes from the line of Moshe Orenbuch – Credit Suisse

Moshe Orenbuch – Credit Suisse

If you could sort of talk about the trust losses, if you look the liquidated receivables showed an increase in dollars for the quarter and just sort of compare that to the improvement you had in the quarter for reported losses.

Daniel Berce

Yes, the biggest difference there is that for GAAP accounting we take a charge-off essentially at the time of repossession but for trust accounting we don’t take the charge-off until the repossessed vehicle is actually sold. So what happened this quarter is that we significantly reduced our repossession inventory from December 31 to March 31, so those charge-offs when the inventory was reduced hit the trust but they essentially had already been taken in the December quarter for GAAP purposes.

Moshe Orenbuch – Credit Suisse

Is that typical seasonal patterns, or is that—

Daniel Berce

It is, the way to look at is when we liquidate inventory the trust charge-offs will be higher then GAAP and when we build inventory, it will be the other way. So December quarter we built inventory thus we had fairly high GAAP charge-offs compared to trust and then that reversed this quarter.

Moshe Orenbuch – Credit Suisse

Do you have the statistics for what the repo inventory did in the quarter?

Daniel Berce

You can get that from Caitlin, the repo inventory?

Moshe Orenbuch – Credit Suisse

Yes.

Daniel Berce

I mean the repo inventory was less then 1% which it typically is this time of year.

Operator

Your next question comes from the line of Jordan Hymowitz – Philadelphia Financial

Jordan Hymowitz – Philadelphia Financial

A couple of questions, first of all the repossession, was at 39%, which seems very low to me for the quarter given the Manheim, what was it in the month of March?

Daniel Berce

In the month of, sequentially every month of the quarter was better. We sold a lot of cars in January, again reducing the inventory levels we had a December 31, and that was the lowest month of the quarter but the recovery rates hit the kind of low, towards the mid 40’s in March.

Jordan Hymowitz – Philadelphia Financial

Mid 40’s like 44, 45?

Daniel Berce

I said low to mid.

Jordan Hymowitz – Philadelphia Financial

Okay, so let’s just say 43, which is towards the low end, but, and I assume that’s continuing at this point and looking at the Manheim.

Daniel Berce

Yes, what we’ve seen in April is consistent with what we saw late in the first quarter.

Jordan Hymowitz – Philadelphia Financial

So if you didn’t sell so much in January with, this is where I’m going to, that your repo recovery rate could have been like, call if 43% for the quarter and that could add another $0.06 or $0.07 all else being equal.

Daniel Berce

Again, what we’re seeing kind of stability in the market at this point, so April would look a bit like March and so yes, you can take those numbers and extrapolate it.

Jordan Hymowitz – Philadelphia Financial

Okay and if that’s the case, you made $0.06 or $0.07 extra cents on the gain, you would have $0.06 or $0.07 extra cents here, the two net [inaudible] out, lower taxes at about $0.02 so I get a core number for you of about $0.02, do you think, again who knows where the economy goes, but if the economy stays where it is today, do you think you can maintain approximately a break-even number the next couple of quarters.

Daniel Berce

I would say that in the type of environment we’re experiencing today that we have a good chance of being at or near break-even for the next few quarters and it really depends how the economy develops for the rest of the year.

Jordan Hymowitz – Philadelphia Financial

And in looking at your book value, I mean your balance sheet, you don’t much to write off so it would seem like book value would stay pretty stable as well.

Daniel Berce

Yes, we feel real good about book value and again if we can be at or near break-even through the rest of the calendar year, we should have today’s book value or maybe a little bit more by the end of the calendar year.

Operator

Your next question comes from the line of Phillip Austern – Valinor Management

Phillip Austern – Valinor Management

Great quarter, I just have a couple of housekeeping items, it looked like the NIM was pretty high in the quarter, especially when you include the other income, I was just wondering if that’s sustainable, I guess interest expense seemed a little bit low.

Chris Choate

Compared to, interest expense was lower in a NIM calculation this quarter then it was in our December quarter, December was a little artificially high because we had to accelerate write off, the expense associated with our former Deutsche Bank for a purchase commitment agreement. And as Daniel noted in his comments, we’ve been successful over the last few quarters raising pricing, the cost of the master warehouse facility that we amended, we didn’t get that amended until March so we really weren’t hit with much of the increased cost under that.

And then finally leverage continues to decline and base rates on which you put these spread levels are also significantly lower then they were say a year ago.

Phillip Austern – Valinor Management

And then just as a reminder what was the total amount of debt that you had the pricing increase on and when did that begin.

Chris Choate

Well the master warehouse facility is a $1.1 billion facility, and that was amended in early March.

Daniel Berce

But the debt out on that is $700 to $800 million throughout the quarter.

Phillip Austern – Valinor Management

And what was the number of basis points pricing went up.

Chris Choate

If we were fully borrowed on that $1.1 it would have gone up around 700 basis points.

Phillip Austern – Valinor Management

In terms of the cash trapping in the second half you mentioned, I assume that’s a deduct from interest income directly, is that right.

Daniel Berce

It wouldn’t be a P&L item, it would just be cash flow that we wouldn’t receive directly or timely.

Phillip Austern – Valinor Management

So it would not show up in the income statement.

Daniel Berce

It wouldn’t effect the income statement at all.

Phillip Austern – Valinor Management

Does it hit the cash flow statement.

Daniel Berce

Yes, it would hit the cash flow statement because instead of the cash coming right back to us it would accumulate in the trust for a period of time.

Phillip Austern – Valinor Management

Okay so it would be a deduct on the cash flow statement.

Daniel Berce

Correct.

Phillip Austern – Valinor Management

And what’s the amount of that that you expect to happen.

Daniel Berce

We, last month for instance we received $25 million-ish out of the trust and that potentially could be reduced in half if by the end of the year, calendar year, if we hit triggers in all of our 2007 deals for instance and the early 2008 deal.

Phillip Austern – Valinor Management

So it could be halved is the most it could be.

Daniel Berce

Well obviously in an extreme case it could be even worse then that, but that’s kind of a good ballpark estimate.

Phillip Austern – Valinor Management

Okay and that $25 million a monthly number.

Daniel Berce

Yes, but that number fluctuates from month to month, typically a little higher this time of year when charge-offs are less, a little lower in the fall when charge-offs are more.

Operator

Your next question comes from the line of Samuel Crawford – Stone Harbor

Samuel Crawford – Stone Harbor

I was wondering if you would, you’ve gotten your network down so, to such a basic level right now that you’re kind of turning over, it looks like you [wouldn’t] be able to sustain break-even for a while, thinking about the loans that you do and the array of equipment risk that you’re taking, I’m wondering how much of that is changing, how many dealers are engaged now, and in particular I’m wondering how you all are, what degree to which, what is the degree to which GM and Chrysler equipment are part of the mix for you at this point.

Daniel Berce

Dealer count, we did business with roughly 4,500 dealers in the quarter. That’s down a lot obviously from what we were doing 18 months ago just because we’ve had to constrain our origination volumes. In our business with GM and Chrysler dealers is, its similar to what their market share is and that hasn’t changed a whole heck of a lot.

Samuel Crawford – Stone Harbor

How might that change in the event of a bankruptcy.

Daniel Berce

Well I mean, it depends on what happens with those entities. I mean if they went bankrupt and were continuing to operate, I wouldn’t expect that to change a heck of a lot, but if they went away then obviously we wouldn’t have any Chrysler or GM business. But I don’t view that as a business risk. We’re operating with highly constrained origination volumes at this point anyway and if one particular maker went away we could certainly shift our origination volumes elsewhere to keep the same levels or the targeted levels.

Operator

Your next question comes from the line of David Rainy – AKRE Capital

David Rainy – AKRE Capital

Maybe just a few more comments about the timing and the process for applying for the I guess up to $200 million tax recovery.

Chris Choate

Yes, well we obviously have to finish our fiscal year and get the books closed and be sort of deep into our year end processing before we can obviously fill out a tax return and make application for that. So at that point we’re into the first quarter pretty good and at some point that could be a few months after that, it could be a little bit longer if it gets reviewed and we have to go through some process with the IRS, but our view is that we would be able to certainly have that sort of in hand by the middle part of fiscal 2010.

David Rainy – AKRE Capital

And when you receive it, how would that impact your capital or capital ratios, just what’s the typical accounting for that.

Chris Choate

Well it’ll just be a cash receipt that our cash balances would go up in whatever month or quarter that occurs and we would at that point based on our operating plan that’s fairly constrained at this point, had some excess liquidity to make decisions about what to do with it.

David Rainy – AKRE Capital

Do you think at some point later this year you might be able to borrow against that receivable.

Chris Choate

I don’t think that’s likely. We don’t need to borrow against it and for the level of originations we’re pursuing so I don’t think that’s likely at all.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Caitlin DeYoung

This concludes AmeriCredit’s third quarter fiscal year 2009 earnings conference call. If you have additional questions, please contact our Investor Relations Department. Thanks to everyone for participating in the call and for your continued support of AmeriCredit.

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