Q4 2019 Earnings Call

On credit Acceptances website at this time I would like to turn the call where to credit acceptance senior Vice President Treasurer does bus.

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 all I, our 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 of which are beyond our control, which could cause actual results could differ materially from such statements.

These risks and uncertainties include those spelled out of a cautionary statement regarding forward looking information included in the news release.

What are all forward looking statements in light of those and other risks and uncertainties, but.

Additionally, I should mention that 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.

This time, Brett Roberts, our Chief Executive Officer can booth, our Chief Financial Officer, and I will take your questions.

As a reminder to ask a question you want me to press Star one on your telephone to withdraw your question press the pound key please standby well, we compile the cumin a roster.

And our first question comes from the lineup Moshe Orenbuch from Credit Suisse. Your line is now often.

Great. Thanks.

I was hoping to get you know Doug you could talk a little bit about.

The market in the fourth quarter, because it just feels like you had a pretty significant again a deceleration in I know you called out the October numbers last quarter.

But that seems to have continued you know that volume has kind of come down 25% to 30% over the last 18 months and that it also just feels like.

The your estimates were kinda up.

Through the you know through the nine months to 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 talked about what you know what's going on that would drive that and I've got a follow up also thanks.

Yeah, I think with respect to the cash flow forecast, a down 17.7 million for the quarter even.

Even though it's a down quarter, it's still pretty small number were up for the year.

Given the magnitude of the cash flows that we're trying to forecast about 9 billion 17 millions a pretty small number so.

It's a it's a negative data point, but a very small one in not want him to concerned about.

With respect to the volume and we're obviously trying to grow the business. So from that perspective didn't meet our objective during the quarter.

Thank you.

Right numbers in the quarter.

Yeah that was down year over year, but you know sequentially pretty close to what you might gas if he just looked at the history are probably the only number attrition again.

I'd expect given the history.

The only number that was maybe a different than the trend line was the new dealer sign ups.

Again, if you look at the history, there you probably expect.

New dealers to be somewhere and then 902000 range.

It was less than that.

Any any thoughts about what that might mean I mean three months ago. You did do you did a kind of liberalize some of the some of the standards for for taking new dealers.

Yeah, I don't know if we liberalizes standards, we changed the system the enrollment fee.

But what we saw during the quarter is our field sales force gave us feedback.

That.

They have standards that they have to meet for new dealer enrollments. They thought those standards were too harsh I thought it was causing them to spend more time enrolling dealers when they would like more and discretion to spend their time with existing dealers. So relax those standards. We immediately saw a reduction in new dealer enrollments.

Whether that change will pay off long term.

We don't know at this stage Gotcha. My follow up question really is you know this is this the fourth quarter. You are we don't get the 10-Q, along with earnings I mean are there disclosures that we would've gotten either as to you know Cecil updates and what you might be doing come.

First quarter in terms of the way, you're gonna reported under Cecil or any other relevant disclosures that we would've had from you know from that filing.

Well again, we'll provide a estimated financial impact on our 10-K, which will be filed fairly short order.

As of now we don't expect to make any matured.

To the estimate so we put.

Q3.

Okay. Thanks.

Thank you. Our next question comes from the line of Josh <unk> from Jefferies. Your line is now open.

Thanks, guys.

Just a going a little bit more to the dealership activity you cited deal that you. There's the net the net loss, which there's a little bit.

Off trend line this quarter.

Looking back we seen certain second quarters and fourth quarters would there has been a net reduction and I'm wondering is there anything seasonal with respect to kinda selling process.

And that we should be thinking about [noise] and <unk>.

Got it just your your color on the dealership channel I read our view what kind of hit your potential target market share is there's still a lot of opportunity Peter grow and what are kind of trends and that in that environment.

When you refer to net loss what are you talking about.

Your net dealers.

Just the number of dealers in the quarter versus the brunt the sequential quarter.

Correct.

Yeah, I think that took now the two big components, there, our attrition and new dealer sign ups I think attrition was in line with.

If you look at the history and a 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 was the new dealer enrollments, which I, which I just talked about.

And do you is there any thoughts on what the how big the market is and how much you've penetrated in that regard.

And there's a you know.

Awful lot of dealers out there you know 60 80000 dealers, depending on what database to use.

Just like there is turnover in.

Our dealer base. These turnover in that dealer base generally as dealers or you know bought and sold and the down the kids, new GM et cetera.

So it's really tough to say what the you know the total addressable market is.

So it's.

I mean, we think there's a lot of room, but obviously the recent trend line isn't very encouraging.

Okay. Thank you and then.

Last question is just you looking at the spread trends obviously you over the course of the last eight or nine years, certainly fit a changing competitive market and you deeper in that in the economic cycle.

But I'm wondering if it is part of the spread 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 how you do see an increasing spread.

It's very competitive market no question about that we said that in prior quarters that continued to be the case and this quarter.

We've also referred in prior quarters. The no we don't price by spread I think if you look at the at the 10-K or even last 10-Q, there's some pretty good information in there on the on the economics of the loans that were 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 we've continued to include it but I think really the more relevant information is in the in the queue in the K.

From that perspective.

Are you happy with the economics of the business. We're writing we just like to write a little bit more of it.

Okay, great. Thanks very much.

Thank you. Our next question comes from the line of Vincent Caintic from Stephens. Your line is now open I.

Thank you good afternoon, I'm, just kind of a follow up for the same a similar topic, but.

So looking at the unit volume in the dollar volume that trajectory downward.

We're thinking about 2020.

Do you expect more the same or there are changes or.

Maybe this month, you've seen and questions any upside.

And maybe it's a trendy since it just competition is a cyclical thing or is it is it a secular thing it's a cyclical event maybe related stage or.

Or is there something else do it thank you.

We've been in a very very competitive period for 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 like I really can't provide you with a an answer to your question on on what we see.

Okay I guess.

Maybe compared to what you've seen in the past intense.

Additives cycles, but maybe in an environment, where I don't have car sales are slowing or for used car prices are declining what have you any historical takeaways that you could point too.

To typically the now the market turns when there is some interruption on the supply of capital.

But 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 data points look at what historically, that's been the case, where.

The capital supply gets interrupted and that's what.

Changes the the market dynamics. So we'll see if that's the same thing this time.

Okay got you.

That's the case I guess.

Is the the applications I guess applications or the funnel is coming in but you're kind of not seeing.

The economics of this applications compared to.

Whoever else is when a deal it system. The economics are being eroded or is it that applications are declining or mix.

I think where you know 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 a figure out how to grow the business a little bit better than we have been.

Okay got it thanks, so much would help.

Thank you. Our next question comes from the line of Argenta to help from Jarislowsky Fraser. Your line is now fan.

Hey, Brad Hello, I live in pushing on what culture. So credit acceptance is featured a stop under companies to walk forward pretty regularly so going back in history can you talk a little bit about the steps you have to take to get there I'm curious because I'm not sure employees are like you're dealing with.

The emerging financial distress. So I'm curious how do you create deposit to look environment in such circumstances.

Hi, it's a good question it took us a long time, we started to focus on it many many years ago I.

I think.

We spent a lot of time.

Indicating.

Do town Hall meetings every every quarter I meet with every team member.

Every quarter that they can asked me a question on line I'll answer it and writing and posted for everyone to see.

We do I do lots of round tables, where I sit with team members and we discussed the business other leaders do that as well we do quarterly survey so we.

Put a lot emphasis on the communication process.

I think you know how hiring is a big part of it you got to bring the right people into your organization.

Consistent with our core values that we that we've articulated it and.

Those are some of the Big then you got to end the right people. It's it's not one thing.

But it's been a journey over a long period of time.

I think the the.

Framework that the great place to work organization uses a pretty good one.

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.

And when you talk what communication are you seeing that employees feel more value than they are listen to that's what you're trying to say there.

Yep No question, Yeah, I think in addition to less Mega maybe this is.

Well, obviously, but we.

We get a tremendous amount of feedback from team members from variety of channels I think the important thing is as we respond to that feedback so.

Oh, we ask them tell them, we need more information we state what our position is are we take action that we report out what we've done so I think that makes employees feel like they're listen to it makes employees feel like there are empowered.

Okay, Okay, and I have been more.

On the sales team so you'll hard quite a lot of salespeople over last three years. So we'll have the older ramped up to what you would call the steady state productivity or do you still see some improvement in.

There are some productivity there.

Yes, 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 which makes it a little bit tougher to see whether you're on track.

As we still have some work to do they get the productivity, where we'd like it could be.

Okay. Thank you.

Thank you. Our next question comes from the line of Benjamin Wind your friend three Sigma value. Your line is now open.

Hi, Thanks.

Yes, you said on the last call that.

There's going to be there's no change to the economics of the business because it's cecil but.

Your 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 you return on assets will decline is that not correct.

No you're net asset will be unchanged.

And for the for the existing book you know your net asset will be on changed until that portfolio runs off for the new loans here assets will actually be lower.

But if you check you don't change the economics of business by accounting for differently.

Yeah, So what I'm, saying is that your but your balance sheet is larger now you're wrong about what's on your balance sheet.

All right.

Given no second a second thing you're wrong about which is the accounting doesn't drive economic so you're wrong in both points.

So you're you're not going to have a larger balance sheet because of Cecil correct.

Okay.

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

Correct.

Thank you.

Thank you as a reminder to ask a question you will need to press star one on your telephone.

Our next question comes from the last Giuliano alone from B T. G. Your line is now open.

Thank you and.

Good afternoon.

I guess jumping into a little more of a high level question, but.

Since you've taken out the enrollment sheet.

From the business have you seen any real change and dealer sign ups for the pace of dealer sign ups. Since then.

I think the numbers for the quarter. So to answer that question, new dealer sign ups, where as I mentioned were were lower than a trend line.

We had 753, new active dealers this quarter 951, a quarter before over a thousand in the second quarter. So feel good that trend line. There was a fall off in Q4 night.

I went through would what I thought the reasons for that work.

Then on a slightly to the question. It looks like there was a couple of revisions to the forecasted cash flows. It looks like 18 vintage came down about 30, Bips and then the nine hundreds came down 20 bips.

It seems like it's the first time since called the first quarter of 18, the dealer loan portfolio.

Negative revision or the purchase on I should say.

Is there anything specific driving that does it collections as it recoveries on a repossessions or anything specific driving those numbers.

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

Sounds good and.

The only other things.

I've looked at it is.

<unk>.

We look at your expenses, obviously at a ramp up on the Salesforce side in terms of increasing our expense base.

Are there anything that would continue to drive the expense base higher at the same rate or should we expect expense based Uh huh.

Our off as originations come down.

But it's a good part of it is just dependent on the level of growth from the business and part of its just depended on all the investments that we think we need to make in the business that aren't directly correlated with immediate growth. So.

You know coughed up like I said earlier tough to predict the growth rate and.

You know the investments in the business has historically been lumpy and I would expect that they continue to be in the future.

Got it thank you and thanks for taking my questions.

Thank you with no further questions in the queue I would like to turn the conference back over to Mr. basket for any additional or closing remarks.

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 that 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 we thank you for your participation.

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