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Credit Acceptance (NASDAQ:CACC)

Q2 2013 Earnings Call

July 30, 2013 5:00 pm ET

Executives

Douglas W. Busk - Senior Vice President and Treasurer

Brett A. Roberts - Chief Executive Officer and Executive Director

Kenneth S. Booth - Chief Financial Officer and Chief Accounting Officer

Analysts

Kenneth Bruce - BofA Merrill Lynch, Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

John M. Hopkins - Chartwell Investment Partners

Operator

Good day, everyone, and welcome to the Credit Acceptance Corporation Second Quarter 2013 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'd like to turn the call over to Credit Acceptance Senior Vice President and Treasurer, Doug Busk.

Douglas W. Busk

Thank you, Kate. Good afternoon, and welcome to the Credit Acceptance Corporation Second Quarter 2013 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 the actual results to differ materially from such estimates. 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 Adjusted 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.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ken Bruce of Bank of America Merrill Lynch.

Kenneth Bruce - BofA Merrill Lynch, Research Division

First -- I got a couple of questions. First, I guess, it was very encouraging to see the tick up in active dealers in the quarter. Could you spend maybe a few minutes and just give us a sense as to what is driving that active dealer number if it's just boots on the ground or if you're seeing just a pickup in terms of interest in the Credit Acceptance product line, please?

Brett A. Roberts

No change in the interest. I think we have a small market share. There are a lot of dealers that would do well in our program that aren't in our program currently, so we feel like we've got a big market out there. We do have a bigger sales force than we had a year ago. And we just continue to sign up dealers at a pretty good clip.

Kenneth Bruce - BofA Merrill Lynch, Research Division

And I guess, maybe just kind of give us the contours of when the sales force growth accelerated in -- sorry, I recognize some of this is a little bit of history. But if you could just remind us as to when you saw the pickup in sales people and what the sales cycle would look like so we can kind of forecast that particular number, that would be helpful.

Kenneth S. Booth

From memory, the pickup occurred early 2012, so year-over-year, the numbers didn't grow that sharply, maybe we are up 10, 15 people year-over-year between 5% and 10%, probably closer to 5%. But, of course, they've been around longer, so you have the experience levels greater than it was a year ago.

Kenneth Bruce - BofA Merrill Lynch, Research Division

Okay. And just looking at -- changing directions, on the forecasted collections rates, a couple of things. One, it looks as if there's kind of a general decline in terms of the expected collections rate just on kind of a year-over-year basis. And then you made some mention about the change in the forecast methodology. Can you give us a little bit of explanation or details in terms of what you're seeing there, if it's just a competitiveness issue, and in terms of the specific change in the methodology, if you would?

Kenneth S. Booth

Yes, we have a statistical model that we use for forecasting alone, so every loan is re-forecasted each month based on what happened to that loan during the month and the characteristics on that loan, that data we've collected. So periodically, we revise that statistical model so it's pretty routine at this point. Every couple of years, we update that, we'd look at all the variables and just update the model with fresh data and a fresh look at the model. So that's what happened, so you see some of the numbers moved around a little bit. I actually view the collection also a bit differently. I saw the improvement in 2013, 2012 as being a positive sign. Usually when we enter this part of the competitive cycle, the collection rates come under some pressure. And we're really not seeing that this time. In fact, maybe a little bit of a reversal of the trend that we would've expected.

Kenneth Bruce - BofA Merrill Lynch, Research Division

Okay. And maybe kind of following that line, what are you seeing competitively either in terms of a lack of willingness to maybe run down the credit spectrum or losing credit standards or pricing? What's the kind of feedback that we had, is that -- this part of the market has seen a lot more interest in the competitive pressure has picked up? I guess, if you could give us some sense as to what you're seeing on the ground that would be helpful as well.

Kenneth S. Booth

We would agree with that. It's -- it continues to be very competitive. I think the best number to look at there is the average volume per dealer. It's down 10%, 11% this quarter, and that reflects the competitive environment. So we are able to post some positive unit volume growth because we grew the dealer base. But the volume per dealer reflects the competitive environment. We didn't change pricing during the quarter, and volume per dealer shrank by about 11%.

Kenneth Bruce - BofA Merrill Lynch, Research Division

And I know this is going to be a question you want to steer around, but I'm going to ask it anyway. Do you have a sense as to what your growth rates should be, just given these tensions in the market in terms of the competitive pressures and what you're able to achieve in terms of increasing your active dealers? Do you have a number that you want to put out there in terms of growth?

Kenneth S. Booth

No.

Operator

Our next question comes from the line of Moshe Orenbuch with Crédit Suisse.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Just kind of building on that -- on a couple of the earlier questions. I mean, it is interesting despite the fact that your enhanced methodology did lower some of your prior forecasts that your kind of current quarter forecast seems to have been improving. I mean, could you talk a little bit about what's going on there, what has changed? And your tone also is somewhat more optimistic?

Kenneth S. Booth

I'll just say -- repeat what I said a minute ago. I think in this part of the cycle, the expectation is and the history is that the loan performance starts to be -- come under some pressure. So typically adverse selection is the reason for that and the reason assigned to that. So you're cautious as you go into this part of the cycle thinking that the large variance and positive variance that we had a few years ago in the opposite environment would likely shrink, and we're seeing that happen. And we -- as it gets more competitive, you might expect it to continue to shrink or possibly even flip the other way. So we're watching the numbers very carefully, and we're cautious about that. But I think this quarter was better than you might expect given what we've seen in other cycles.

Moshe Orenbuch - Crédit Suisse AG, Research Division

And just kind of building on that, your level of kind of essentially originations you talked about a decline in originations per dealer but the total amount is actually growing. I mean, is that -- and I would assume that that's a function of an improved kind of confidence in the returns that you're able to generate on that?

Kenneth S. Booth

Well, I think the thing to keep in mind is the tax season was delayed as well. So the March quarter was probably a little bit better than what the number indicated and the June quarter was probably a little bit worse than what the number indicated. We're up 2% for the year, which is probably a better reflection of what worked of our actual growth rate when you remove the effects of delayed tax season.

Positive growth for the first 6 months in a difficult environment and strong returns, is -- we're okay with that given where we are in the cycle.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Yes. Could you talk about your kind of capital plans in that context and the context of that level of growth?

Kenneth S. Booth

Well, we continue to be in a very strong liquidity position. Consistent with the way we run the business for the last several years, we continue to look 12, 24 months out at what our capital requirements are and adjust our financing plans accordingly. So we're not doing really anything differently there than we have in the past.

Moshe Orenbuch - Crédit Suisse AG, Research Division

And just to kind of put a slightly finer point on that as it relates to kind of share repurchase, you did repurchase a little more in the first quarter and saw a little less growth then. I mean, should we be thinking about it relative to the amount of growth that you're seeing or is there something else at work?

Kenneth S. Booth

I mean, I think we're going to continue to approach stock repurchases the same way we have in the past. And to refresh there, our first priority is always to make sure that we have the capital available that we need to fund the anticipated levels of loan originations. If we do and we have the opportunity to buy back stock at a price that's less than our estimate of intrinsic value, we're going to continue to do so. So nothing really changed in Q2 versus Q1. We continue to think about it the same way. We continue to employ the same criteria. Well, you make a good point, though. The faster we grow, the less capital we have to buy back stock, and the opposite is true as well.

Operator

[Operator Instructions] Our next question comes from the line of Nick Zulovich with SubPrime Auto Finance News.

Nick Zulovich

Other questions have already been answered, but I just wanted to touch on your assessment of the impact of the CFPB, how you've bolstered compliance efforts and just that the fact that, that agency had started to roll out some enforcement actions this year, just what's your assessment of the regulatory landscape with that new agency in place?

Kenneth S. Booth

Okay, good question. We have -- we're used to regulation. We're regulated in all 50 states, and so we're used to dealing with state regulators. This is obviously something new. We've had a good long look at it and we're comfortable where we are from a compliance perspective. We've always taken it very, very seriously. We're watching what the agency does and we're responding appropriately to it. We have -- we're dialed into the industry associations and we're certainly in the right circles to be first in line to understand if there's any new expectations for companies in our industry and to make sure that we comply with those expectations. It certainly adds some expense and some things that we -- that they've come out with, we've had to take a hard look at. But there's nothing specific to worry about there at this point from our perspective. But certainly, we'll keep a close eye on it and do what we need to do there.

Nick Zulovich

And also, maybe just to follow up on some of the earlier questions on competition. Have you all seen any lessening or intensifying of the more -- other captive lenders or commercial banks buying deeper contracts that might be in the space that you occupy? Has that activity either slackened or intensified from your perspective?

Kenneth S. Booth

It's hard to say from quarter-to-quarter whether it gets a little bit better, a little bit worse. Others -- hundreds of players in the subprime auto space and no single group is -- or single company is that important. But there's lots of people out there that are making auto loans, lots of people making auto loans in our segment of the market that continues to be very competitive, and that will continue until there are some change in the capital inflows to the -- to this industry.

Operator

Our next question comes from the line of John Hopkins with Chartwell Investment Partners.

John M. Hopkins - Chartwell Investment Partners

Has the composition changed much between the new volume that you put on that is dealer loans versus purchased loans? And is that a competitive issue as well?

Brett A. Roberts

I mean, the percent of our originations that consist of dealer loans has been pretty consistent now for a couple of years. Over 90% of the business that we've originated for the last couple of years has consisted of dealer loans, and that was true this quarter.

John M. Hopkins - Chartwell Investment Partners

Great. And can you remind me, you've obviously got a longer period in this industry than me. What was the trough yield, economic profit yield that you've seen in the past? I think if I remember correctly, 2006 and 2007 was a pretty competitive time period. What were your trough yields at that point in time?

Brett A. Roberts

The trough returns on capital were approximately 11%.

John M. Hopkins - Chartwell Investment Partners

Okay. And how long did that persist?

Brett A. Roberts

Just going from memory here, it persisted a year or 2.

Operator

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.

Douglas W. Busk

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.

Operator

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

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