Q3 2019 Earnings Call
Good day, everyone and welcome to the credit except it is corporation third quarter 2019 earnings call.
Today's call is being recorded.
Webcast and transcript of todays earnings call would've made available on credit acceptance website.
At this time I would like to turn the call over to credit except in the senior Vice President and Treasurer that's left.
Thank you.
Good afternoon, and welcome to the credit acceptance Corporation third quarter 2019 earnings call.
As you read our news release posted on the Investor Relations section on our website, a credit acceptance dot 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 portrait beyond our control, which could cause actual results could differ materially from such statements.
These risks and uncertainties include those spelled out of the cautionary statement regarding forward looking information included in the news release.
Scitor all forward looking statements in light of those and other risks and uncertainties.
Additionally, I should mention that to comply with the Fccs regulation G. Please refer to the financial result section of our news release, which provides tables showing how non-GAAP measures reconciled to GAAP measures.
At this time, Brett Roberts, our Chief Executive Officer can Booth, our Chief Financial Officer, and I will take your questions.
To ask a question. Please press star one on your telephone keypad.
Again to ask a question press star one any telephone keypad to withdraw your question first the pound scheme.
Your first responses from John Roman of Janney. Please go ahead.
Morning, guys.
Morning.
So.
Obviously I think most concern here is just a disclosure on c. So in the 10-Q is it are you gonna have to portfolios. When you when you adopt cease all or is this all gonna be just one one portfolio.
I mean, you're going to have a dealer loan portfolio and then you will help.
The purchase loan portfolio.
That exists as all 12, 31, 2019 will be continued to be accounted for as it is today and purchase loans originated after one 120 will be accounted for under Cecil well, let me clarify the purchase loans.
Will be accounted for as.
As prescribed under transition relief.
Okay.
Is there a timing issue it sounds like in the queue that.
There's a big upfront provision to establish the allowance for a new loans right and obviously you guys have to generate a lot of new loans, given the asymmetrical nature and would you collect loans lot of early payment defaults and right really pant, but there's a lot of losses that are up front in a in a typical pool.
Is this like if it isn't a timing issue like when we get too you know a period on what's your portfolio kind of has a full duration Oh Cecil compliant loans within it.
Does do the economics moderate out meaning like you know just 2021 or 2022, when you get to the backend to where it's conceivably more profitable CCC. So that we got get to some type of parity in the reported results.
I mean cecil's all time.
So you know we're going to record a provision up front and as we say in the queue. We're gonna record.
More revenue an equivalent amount to the provision upfront in revenue over time.
So the impact of cease all be great as we say in the period of adoption because you have all the upfront provisions.
But a modest amount of revenue recorded at that higher yield.
Okay. So we start off let's just say we started off with the 60% reduction in comparable net income and we get down to 30% by the end of the York. So the range that you provided in the queue. I mean does it continue to moderate down into 2021 as the revenue catches up to that upfront provision I'm trying to figure out.
You know if if 2021 and 2022 earnings are down 30% to 60% as well or if there's a point in time at which the revenue catches up to the provisioning and you have a full duration portfolio Cecil loans in there. We are now you now your reported results match, the economics of the loans, which frankly, we're probably more.
You know appropriate under the current accounting methodology, what point in time does that match.
Well it all it all depends on growth.
So if you assume a constant growth rate and assume loan performance is exactly as forecast.
The difference between Cecil net income and net income as reported under our current accounting.
Will narrow overtime.
So you don't want to give us an idea.
How far out that time is one that narrowing gets indiscernible.
No, we're not not really going to provide any incremental disclosure in that regard relative to what's in the Q.
Okay, well you will your provision expense because I mean, we're getting good net charge off in delinquency data like most finance companies provide or is that still or is this just kinda porting. Your current reporting which has you know forecasted collections and advanced right now it's still going to look the same or is this going to be now look like you know.
Other types of finance companies with the data that we got to build out an allowance charge off in a provision going forward.
I mean, we'll continue to provide the forecasted collection rate in advance of information, we do today, a and will comply provide whatever supplemental disclosure as required under Cecil.
And then you said that you're gonna have to gross up the loan portfolio and then you know take basically net the difference out of the allowance.
The gross up is the gross up because now you're reflecting the loan to the consumer or is it still the advanced the dealer partner that is your receivable and if so why the gross up.
I mean, the gross up is basically what's required under the PC de method in Cecil and what the gross up reflects this will calculate an effective interest rate based on the expected cash flows and increase both loan receivable and related allowance by the P.B. of the difference but.
Twin contractual cash flows and expected future cash flows. So you know Cecil has this you know kind of starting point relative to its accounting relative to contractual cash flows so were grossing the balance sheet upto reflect.
The contractual cash flows in the difference between expected cash flows.
On a present value basis.
It does that.
Are we talking about cash flows are that the consumers are paying right or is that the cash flow based on the pool.
Yes, it would be the cool okay.
Okay, all right. Thanks, I'll, let someone else up on.
Thank you your next responses from James Olin of Credit Suisse.
Good morning, Thanks for taking my question. The a lifetime loss estimate was pretty good I was just wondering how much the dealer hold hold back and loss sharing reduces your lifetime loss expectations.
Like I like I said, a minute ago, we're not going to provide any incremental disclosure relative to c., so but obviously.
You know if we're splitting the collections 80 20, what's the dealer and you compare expected future net cash flows to contractual future net cash flows.
That dealer holdback as is a significant element.
HM Gotcha and.
And then if I could ask a unrelated second question.
Revenue from lending the dealer fee could you just talk about a that decision and maybe quantify that.
Well that the.
Disclosure of the amount of dealer enrollment fees. This on.
In footnote aid in the 10-Q. It was a you know a million for in the third quarter. This year and it was just.
Designed to make the portfolio program more attractive.
Gotcha.
That's it for me thank you.
Thank you your next responses from humility Buckingham.
Hi, Thanks for taking my questions I, just maybe a couple of follow us on the enrollment fee. So yes, you have typically been recognizing about $4 million of that enrollment to be on an annual basis.
You know is there any run off today like how do we think about it the wavering of that fee. You noted does that $4 million just basically go to zero in 2020 or is there any kind of run off and on the recognition of that fee.
Yeah, there will be there will be some run off so little.
Gradually go from you know million for what just what this quarter is it'll.
Gradually wind down to nothing.
Over the next year.
Okay, and then can you give us are sensitive to the potential impact on bringing on new dealers to the to the portfolio program. How often are you seeing kind of that upfront fee being a headwind I know you provide you know optionality from which they would you like and pay for that but.
What's the potential impact the bringing on new dealers.
And then you know as you think about kind of the dealers.
Maybe then would they would current dealers be able to maybe then come and go from the program as they may want to for a period of time without having to think about hang that upfront reenrollment fees. So could you is it a potential that you could see you know a dealer that takes six to 12 months and doesn't get as much business and or any business and then kind of it can come back in and Reenroll in the program.
What's the potential impact from that standpoint.
Well, we eliminated the fee obviously to get rid of an obstacle to growing the dealer program.
But it's hard to say how that will play out in the in the enrollment metrics going forward.
But it is [laughter] would it be occasion, a scenario where someone who is an active deal on the platform could stop participating for a period of time and then come back to the program you know without any disincentive for re enrollment.
I don't think that's going to be a huge factor going forward and historically dealers have been able to stop using the program and restart.
So that's not going to change.
Okay.
And then another question just on the option lanes, we've seen some reports indicate that I know some lane pricing weakness that we use in October can you just talk about what you're seeing in the auction lanes. So far in October and have you experienced any uptick in maybe you know no sales any auction lanes, if you're not getting the bids of your exposure.
I think.
You know as we've talked about on prior calls used vehicle prices are a very small percentage of our overall net cash flows.
Historically, the best used car market environment in the worst hasn't had a huge impact on the overall collection rate.
So we haven't seen anything to date that would materially affect collection rates.
Okay. Thank you.
Thank you your next responses from David Scharf JMP Securities. Please go ahead.
Hi, good morning, Thanks for taking my question.
Obviously, a lot of moving pieces or.
We're still gonna have to work through regarding Cecil than in refining our forecasts, but I'm wondering just it more of a practical operational not accounting level I know you don't give guidance.
But I'm wondering Directionally is you look at.
Kind of weird the size of your sales force is now I'm sort of the seasoning and productivity of them.
Given given your expectations I guess for the growth in the dealer network going forward.
Based on those assumptions as well as the competitive environment and whats.
No roughly give or take 10% year over year decline in volume per active dealer.
Well, we generally.
[noise] expect origination volume to increase in 2020 on a year over year basis based on everything you're seeing right now.
It does sound like you're asking for a forecast where that we're not getting.
Forecasting next year I mean, we have a fill a small share of a very large markets. So we're open to continue to expand our share in the future and we'll just see how that plays up.
Okay, maybe I can try to box you in a little little freezing in a little differently.
Based on the competitive environment, you see today, which seems pretty similar to.
[noise] been experiencing for last couple of years, you've had a couple rounds in recent years of escalating.
Sales count hiring to expand the footprint.
With the pullback in rates what are still in attractive ABS market suggestions that probably.
They still not be any any kind of competitive shake out on the horizon or you were seeing any incremental hiring above and beyond just sort of than normal year to year in any kind of ramp up in sales headcount over the next 12 18 months.
Probably not a material ramp up we have established our the target size of the Salesforce that we have.
Every zip code in the country mapped out to two sales territory.
We.
Largely hit our target there you're never going to have every single territory filled because of turnover.
And now it's just a matter of trying to improve the productivity of the Salesforce we have it that's the.
The current plan.
Okay got it thank you very much.
Thank you your next responses from.
Giuliano long enough BTI Ji. Please go ahead.
Good morning, Anna Thanks for taking my questions [laughter].
I guess, starting on a similar topic on seasonal.
Is there a way of thinking about the average duration of the assets and <unk> and by that what I mean is how fast you recognized the offsetting revenue.
Oh that you're taking on the reserve side.
When I think the best thing.
Thing to look at is the.
Table in our press release that shows.
The percent of forecast realized I mean, I think that'll that'll get you in the ballpark.
Okay.
That makes a lot of sons.
And then [noise].
I guess is thinking about a similar question, but HM.
Do you expect the largest him back in the first quarter, obviously I heard you said theres, obviously going to be more of it I know you more of an allowance impact and less revenue impact and the and the first quarter of adoption.
Is there any difference in the recognition of the gross up versus the allowance on legacy portfolio or does that all happen at the same time and is it all recognized sinful.
I mean, the the gross up will happen.
All at once and then you know we would recognize revenue I'm going forward off do I expected future net cash flows off of that yield so.
The legacy portfolio.
Oh really there won't be much of all aside from the balance sheet gross up there won't be that much of a seasonal related impact.
Sounds good then kind of shifting a little bit to the competitive environment.
Obviously your unit volume has been growing as fast you've seen dollar.
One of your dollar volume increased Ashland unit volume for little while is there any kind of limitation on your ability to continue increasing dollar volume versus unit volume.
Yeah, I don't think that's going to be a long term driver results. I mean, there is a limit to how how much you can increase the size of the average transaction I mean, what that is I don't I don't know, but I don't see that being a lot a long term driver of our results.
And one of them because one one last one one of things that obviously, you've historically done a great job in terms of going out and Oh, the used car lots or to buy here pay your type dealers.
At least and so some of my checks have heard of a lot of yeah, Oh, yeah, I'm kind of dealers getting calls from your sales force or at least being pitched have you had much success and breaking into some of these kind of new car dealerships.
Yeah, I you know, but I think we have I think we're we've made a lot of progress. There I think you know a lot of the increase in the purchase loan penetration rate over the last several years is due to our success.
Writing business with those stores.
But it makes less sense, thanks for taking my questions.
Thank you your next responses from Benjamin.
Andrew three signal value. Please go ahead.
Hi, I'm in your Cecil disclosures, you say that a 2020 earnings will be down approximately 30% to 60%.
And I'm looking at consensus for 2019 is about $35 per share does that mean that 2020 earnings are going to be.
Between if I take the 30% in the 60% downrange will be between call it $14 and $24.
I guess it depends on what your projection for 2020 would have been under current gap.
Okay, but based on if I'm just using consensus for 35 than we should expect 2020 earnings to be somewhere based on our own modeling between 14 and $24.50.
I mean, I think you're going to do the math there I mean do you see up I'll start with or not but 30 to 60 presenter. Okay. Second question is just regarding on the build up of the reserve if I take the 15% just for simplicity of loan loss a mountain I apply that to the.
Gross stuff amount of loans I'm getting a reserve about a billion for and your current reserve is about 500 million. So number one does not mean that deem that the a loan loss reserve will increase 900 million and secondly is that 900 million.
Gonna be deducted from book value, So that book value will be down from what was around 2.2, so it should be down around a billion three.
Then are you asking relative to the transitional relief portfolio I presume I'm just I'm looking at what is your book value Gonna be next year and if we're increasing the reserve sits by 900 million then I'm assuming that book value will go down by 900 million is that correct.
Well the the transitional relief portfolio will have no impact on book value.
The.
Cecil as it relates to new loans.
Well you know required upfront provision as we've described and be offset by.
And equal amount of revenue earned over the life of alone.
Okay. So.
What you're saying is when when ceaseless adopted there won't be the step down in a the adjustment in book value.
Correct, there will be a difference in the timing of income recognition.
Okay. So it's just so I understand so we're not gonna see adoption, we're not going to see a decrease in book value upon adoption.
Correct, Okay. Thank you.
That's it.
Thank you your next responses from dominate Gabrielle of Oppenheimer. Please go ahead.
Hey, guys. Thanks for taking my questions I'm, just real quick when you're thinking about seasonal and you've built the dealership.
Your web of dealers I should say has grown quite nicely across the country and you know some would say that the real opportunity here given.
The penetration has been under price pressure, a little bit would be when others pull back you can really.
Jump in.
Got it and really increase the penetration, but this would be at a time obviously when.
Most likely the when other people are pulling back the the economic outlook is not the best potentially and so when you think about the capital you'd have to raise given where you would you have to reserve.
Because of seasonal in that environment does that create any obstacles to that type of.
Plan of attack if that would be your plan to increase penetration this capital.
Issue.
During that time period.
Or would you change your plans should I say, given I don't think that does not only through your banker I.
I don't think we change our plan we operate the liability side of the balance sheet very conservatively, we have a lot of unused availability under our revolvers.
Yeah, you know modest reliance on short term financing and were lowly leveraged. So you know I think that that capital structure sets us up to.
Deal with ER stress capital market scenario pretty well, but obviously it have to see how that plays out.
<unk>.
Okay, Great and then have you you know has there been any difference in the volumes are the penetration this quarter.
Given that a large player had stepped away for quite some time and seems to have had their originations jump up a little bit in this quarter I have you seen any increased competition because of any large entrance reentering the market and how do you and and would you expect that to you know.
Potentially.
Put pressure on in the coming quarters.
It's a very large markets or one player does usually doesn't impact our results.
What happens going forward, we normally have a prediction on that.
Sure sure and then maybe I just missed it and the Q did you did you provide the lifetime loss I might just missed it was there a life time loss estimate.
I mean, the you know the lifetime loss estimates would just be in our Q or a press release and they'd be one minus the forecasted collection rate.
Obviously on the portfolio program, you need to think about dealer holdback too but.
Alright, great. Thanks, so much guys. It really appreciate it.
Thank you your next responses from Mark Hammond of Bank of America. Please go ahead.
Thanks, Good morning.
General rally in rates have you had an opportunity to get her maintain.
More favorable pricing either on the consumer Loon I'd advance or the purchase loan.
We have we haven't changed pricing in response to raise.
Got it and I assume question on rates, but more on the liability side. So.
How are you thinking about addressing the 2021 unsecured bonds.
Two years away, but is it worth taking advantage of the rate environment, calling the 20 ones early at par in extending the maturity.
It's certainly something we've we've we've been considering.
We haven't made a decision yet.
Understood. Thanks for taking my questions.
Thank you your next responses from Wendy Heck of good now investments. Please go ahead.
Thanks for taking my question so.
I just have a few questions on the Cecil matter Brett.
Is there any change to the economics of the business because of C. So.
No Cecil's just accounting.
Right is there any change the free cash flow or the return return on investment in the business.
Oh, there's not.
Well what will the what were your lenders focus on well they continue to focus.
Two except adjusted earnings or will they focus on Cecil.
I think they'll primarily focused on adjusted earnings.
Okay, and so will you continue to report adjusted earnings like you have for the last.
In years or whatever the number is.
That's our plan.
Okay.
All right.
That's it thank you.
Thank you.
Thank you your next responses from the line of John Rowan of Janney.
Hey, guys just a follow up here I'm just to be clear so the allowance.
For loan losses is going to on one 120 will gross up and keep the net number the same but if you look at you know your your number for that was it 10% to 15% law or 12% to 15% booked upfront when you make a new loan that's not the lifetime lost meaning that that's not going to be the allowance ratio over the overall pool because.
That would imply that the net number is gonna have to actually go up because to me. It looks like you're gonna have to have a three ish billion dollar allowance on one 120 for your entire consolidated loan pool, which is about right you would be about 30% of you know the overall gross balance meaning that would be the inverse Io VR forecast.
Collections that sound right because one of the other questioners was focusing on like a billion and a half number for an allowance that sounds kind of low to me.
The the two separate things the 12% to 15% would be.
Though our current estimate of the provision recorded at the time of the site.
For new loans originated after one one of 20.
Okay. So that's not like up that's not a full full lifetime losses, meaning that it's going to be our allowance ratio right. It's gonna have to be closer to 30%, which is now that would that that's the amount of the provision we'd record.
At origination.
Okay, and then going forward is the provision just going to be the net differential between the allowance.
From period to period or is that still based on.
The expected cash flows are the pool.
It'll still be adjusted for the expected cash flows the pool.
And so and as time goes on to the portfolio. So the provision expense jumps in farce. Then you said the revenue yield comes up overtime. So the provision expense goes up and that those earnings but the portfolio yield will come up as well over time, it did I hear that correctly.
Yes will the revenue on on loans originated after one one of 20.
The revenue will be recognized at an effective interest rate that is based on contractual future cash flows.
So that's how you.
You know recognize incremental revenue overtime that offsets the upfront provision.
Okay, all right. Thank you very much.
To ask a question. Please press star one on your telephone keypad.
Your next responses from Vincent can take up Stevens.
Hey, Thanks, Good morning, guys and sorry, some more seasonal questions just because I know it's.
It's big topic, but just to clarify so first quarter 2020 bps or results.
I'm going to be the same metrics. The same tables that you have now is just youre going to add the Cecil disclosures you have to but the S that you're focused on and presumably what we're going to be modeling on is gonna be on.
Your current methodology for.
For your financials.
Yes, I mean, we we have always run our business off of the adjusted financial results. Thus, we think that that's a tourist reflection of our.
Underlying economic performance and that's what we're going to continue to focus on and we'll continue to disclose that.
Okay. That's helpful in that that smooth things out so very helpful.
And so so no book value impact on January 1st because you're ready reason you or your balance sheet are ready has net losses and so you're just basically going to break it out by having the gross.
I'm, sorry, net loans by having the gross loans and indeed, the the allowance broken out separately, but I guess I'm wondering for the.
On the disclosure, but the 2020 net income being affected 36% with the greatest impact occurring in the quarter of adopt I guess what.
Why in why is the greatest impact going to be into first quarter, given that you've already I guess, maybe adjustments to the book value there and you're just focusing on originated loans going forward.
Well, it's it relates to the loans originated after one 120 and it is because that will recognize the provision at loan originations on all the loans originated in the first quarter.
Well recognize revenue on those loans at a higher effective interest rate based on contractual future cash flows.
But you will have.
Upfront provision for each loan, but you'll have a modest amount of income recorded on those loans at that higher yield. So that's why the impact will be greatest in the quarter adoption in subsequent quarters, you'll still have the upfront provisions, but you'll have a larger portfolio.
So on what's your recognizing revenue at that higher contractual future net cash flow based effective interest rate.
Okay got it so each quarter, we'll look the same but because you are building up a portfolio of higher revenue.
It sort of neutralizes the future quarters is that.
Right, but over time overtime, all else equal okay perfect.
And then sorry, I also had a question about the 12% to 15%.
When you think about that so that's unrelated to the lifetime law switches, which you disclose in your.
Forecasted tables.
Well the 15% that's.
I guess, how how's that number determined that's just the offset the direct offset or what would be directly offsetted by the the finance tried trevi Im just kind of wondering how that's no that that's the difference between what we pay for the loan.
And.
The present value.
Oh.
What we expect to collect discounted at that effective rate associated with the.
Contractual cash flows.
So its outlined under in a in our 10-Q, others a section called application of Cecil the future loans that describes how it's done.
Okay got it okay.
Okay. Thank you very much very helpful.
Your next responses from Domini Gabrielle of Oppenheimer.
Hey, sorry for the follow up just to just to be clear right.
When you're going forward, then you're saying your existing book on both the dealer loans and at this is kind of been asked but.
Your existing book on the dealer loans and the purchase loans have already been reserved in the way they should be so going there's no four year phase in of any kind of to your reserve. We're just talking about new originations going forward. The rest is staying the way this is that.
Correct.
Well, you're you know as we described in the queue, we're applying transition relief to the existing portfolio when were grossing that up as we've discussed so.
You know that that portfolio is.
We'll be accounted for under Cecil after that gross up and then loans originated after one 120.
We'll report up a provision at origination and then more revenue overtime and you'll end up in the same place where ultimately cash equals accounting.
Okay. Thanks, Thanks, so much I really appreciate it.
No no further questions in the queue at this time.
[noise] [noise], we'd like to think differently.
Sorry.
Go ahead I'm sorry.
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 IR at credit acceptance Dot com.
We look forward to talking to you get next quarter. Thank you.
Once again this does conclude today's conference. Thank you for your participation.
Yes.
So.
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