Q2 2020 Credit Acceptance Corp Earnings Call

Good day, everyone and welcome to the credit acceptance Corporation second quarter 2020 earnings call today's call is being recorded.

Well look at us and transcript of today's earnings call will be made them available on cut acceptances website. At this time I would like to turn call over to crack except pits keep freshly officer the bus.

Thank you.

Good afternoon, and welcome to the credit acceptance Corporation second quarter 2020 earnings call.

As you read our news release posted on the Investor Relations section or website at <unk> are that credit acceptance dot com and as we 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 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 Bose and other risks and uncertainties, but.

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.

We understand that our 10-Q is not yet available.

System with past practice, we submitted the 10-Q to the FCC at the same same time, we released earnings.

It's releases delayed due to technical difficulties that the FCC that are preventing it from accepting filings from any company.

At this time, Brett Roberts, our Chief Executive Officer can boost our chief financial Officer, and I will take your questions.

I can ladies and gentlemen, I feel minder, if he would like to have a question simply press part and the number one on your telephone keypad.

Good question, that's been answered all your vision to move you know so from the Q lease Chris to Punky.

Our first question is friendly shale range from credit Suisse. Your line is over.

Great. Thanks.

Yes. It could you could you talk a little bit about when when you made the cash flow assumptions. This quarter. How did you take into account you know what's likely to happen given that a you know as it stands today stimulations tomorrow could be renewed could be renewed at the same different level like how did you kind of take that into account as you look forward.

So the in the first quarter, if you remember.

We had.

A 44 million dollar.

Unfavorable change to our forecast.

That was that reflected just the forecasting model.

Reacting to what happened in the first quarter.

And then since the forecasting model doesn't know that.

There's a pandemic or that we're in a period of.

Economic disruption, we took an additional roughly $160 million write down.

To account for look we.

Expected would be.

Difficult period from a loan performance perspective.

This quarter, we didn't make it sort of 44 million you get that goes kind of them a mechanical result, and 160 was largely subject.

This quarter, we didn't make any additional subjective adjustment. We gave you. Some collection numbers you can look at.

Generally seeing favorable trends there, we just let the forecasting model that out the result, and that's what we book too.

Right, Doug, but I guess I was asking.

The forecasting model.

Looks what I mean, what are the inputs because it does it look at it just looks at it.

I mean, what are the inputs.

Well the forecasting models going in place for many many years.

It's a ace.

Empirical score card based approach, where it looks at many attributes of alone and then forecasts.

Future cash flows based on historical performance of similar lungs, and so that that part hasn't changed.

But it doesn't have.

A macro factors in there like you know when are they going to you know to what degree are they going to.

Pass and other stimulus.

Oh, it doesn't hit unemployment in there it just looks at the historical performance of similar loans based on variable that we capture either at origination or throughout the servicing process.

Just wanted to make make this clear you said it doesn't take into account to unemployment.

Great said it.

Well the likelihood that that borrower I mean, how do you assess the likelihood that that bar will continue to pay them.

I think it's just why is that.

And then.

Okay space I, just based on its based on the performance of loans with similar attributes unique characteristics.

Got it it has not nothing to do with the current state of the economy.

Correct.

That's correct. Okay. This objective adjustment as as I described as it is intended to take that into account right and you reversed part of that subjective adjustment right now would you take that back into income.

No I'm not I'm not sure if you're listening so we didn't make any additional subjective adjustment in the second quarter.

Right.

Oh, I don't I'm looking at the front page the press release, just let it sit idle.

There was a remaining reversal provision of credit losses of $14.8 million in the quarter, that's what I was referring to.

Yeah. So that's that's the Cecil it and so we're just talking about the cat a change in the net cash flows here.

Got it okay.

That's right.

I see so.

And how is that number that 14.8 million computing.

I mean, the the 14.8 million.

Is the.

Change.

In the present value.

Oh, the expected future net cash flows.

Oh, it's the amount it was when we said differently, it's the amount of expense required to.

Reduced alone asset to the present value of the expected future net cash flows so collections less dealer holdback.

Okay. Thanks very much in this case in this case it wasn't an expense it was a it reversal.

Again as a reminder, if he would like to ASCII verbal question simply press Star then the number one on your telephone keypad.

Our next question is from John Rowan from Janney. Your line is open.

Good afternoon guys.

Well.

Did you have to do contribute any cash to any of the ABS facilities this quarter.

[noise] or not cashed any collateral.

Okay no.

And then was there any discernible.

Shift in the credit borrower of or the credit profile of your borrowers given that you went out another month in the loans. This quarter were up to 50 59 months in duration.

No.

Okay. I mean, why go out further in duration when you know obviously the outlook for the next couple of at least next year is certainly a little uneven given that the pandemic and that's it for me. Thank you.

You got it was just a function wafer.

Sorry to no go ahead Brett.

And we Didnt, we didn't change our program during the quarter. So we offer a variety of loan terms and the customer that's less than the vehicle along the dealer and the long term that matches.

You know what their desired result, so.

We don't mislead control the average long term.

Okay. Thank you very much.

Again that is star one to ask a question.

The next question is frontal janow below now from BT <unk>. Your line is open.

I missed what kind of dig back into the the modeling question a little bit well there just curious about what you're saying that it kind of goes back and looked at.

At the statistical model that you use that's kind of curious from accounting perspective.

Because you would like to see so is there any requirement to use an economic forecast and in the estimate to use on a forward basis.

Where are you using away a little bit of different framework there.

Oh, no there's no thought deployment to me.

Okay that makes sense and then well think about.

You bet that for them and if you go back within forecasted for many years, we've taken a number of runs.

At including unemployment data in the actual forecasting model.

And it it just doesn't help the accuracy of the model as what we found historically, we we went actually to even local unemployment data.

See if we can figure out.

You know how to use that information to forecast more accurately and it just didn't work. So if it was possible.

We do it if it made more accurate, but something that doesn't.

We've just treated that like we didn't the first quarter is as a subjective adjustment very similar to what we did during the financial crisis.

We made an adjustment of a similar magnitude and actually in retrospect, it turned out to be pretty accurate.

It doesn't mean this one well I think probably should emphasize like we did last quarter. We're in the early stages of this oh, there's a lot of uncertainty.

I don't think you should look at our forecast.

Either at the end of the first quarter it into the second quarter that as a higher number it's an estimate and I think we we've stressed that there's a lot of uncertainty around that.

<unk>.

Thanks lessons, but I'd be curious about is [laughter], how are you kind of planning or.

Adjusting your business for the central roll off some of the stimulus.

Are you thinking about you putting in place different programs to provide support to two customers. If they runs more trouble or how do you think about how to operate your business given the uncertainty around yeah unemployment additional unemployment benefits and other things of that nature.

It's really won't we've always done so we've we've tried to run our business in a conservative fashion.

We know that you know predicting the future is difficult we don't expect a dog and always turn out like we plan. So we've been through a lots of challenges over the years and the conservative approach is the only one we know that's the one we're going to continue.

That sounds good. Thank you for taking my questions I will jump back in Q.

Hello.

Hello.

I can hear your day, but.

Don't hear anything there.

Look like there is one more person to Cuba, we lost their operator so.

Let's just given the secular just comes back.

I think there's three in the queue yeah.

Okay.

Please be patient and segment the operators are spanning via the chat so he's trying to get back in.

Yep.

Okay.

I apologize for Italy. Your next question is from Baby chart.

From JMP Securities. Your line is open.

Hi.

Good afternoon.

Still here perseverance paid off.

A couple things one is.

Yes, I know in the past you use.

Mentioned that used car values.

Material impact kind of your all in returns.

Just given.

That the manheim that used car values are at such high levels at least at the end of June.

Can you just come yet 32nd tutorial again.

Why that shouldn't impact the.

Net debt returns on the portfolio, particularly given.

The degree to which you repossess.

Let me here, so think about it so if you originate alone today.

You know that maybe it's a 60 month loan or 48 month loan.

Some of the loans the originate you're going to end up Repossessing and on the day you sell that collateral.

It matters, what what the market is in a good market, you'll get a little bit more money in a bad market you get a little bit less.

What happens over the course of the 60 more loans you will go through ups and downs, probably three or four alone.

At some point the net spectrum, you'll you'll be lucky and the market will be good at other points the opposite will happen and so typically being just look at a one months originations.

Sort of evens out.

So the way we look at it as we kind of track the values and look at the depreciation curve and if you look at over 18, 24 30 month period.

There is not nearly as much volatility is the way people look at the the Manheim index, which obviously changes every month. So that's one factor that.

No you tend to have ups and downs and evens out over a period of time and then the other factor is.

Repossession proceeds just on a huge portion of the total cash flows most of the gas that we collect comes from customers, making payments. So the combination of those two things I mean that for US used car values are a critical variable yeah sure it matters to some extent.

But.

Because of evens out and because it's not a huge percentage of the cash flows it's not as important as people perceive it to be.

Got it no no. That's helpful. I guess, one other thing I would add there is on the portfolio program.

80% of the increase or decrease on the.

Value of the vehicle.

Either increases or decreases the amount of dealer holdback. So the fact that we're splitting the collections on the loan with a dealer.

Provide some.

Insulation.

For us in terms of variations and then vehicle prices and other factors that impact warm performance.

Got it got it sounds like level yield accounting allows for the short term fluctuations in values to get Kevin.

Smoothed out overtime or it just isn't impacted as much understood that that's helpful.

I'm wondering I'm not sure if it was.

Address in the last question just in terms of.

Forbearance and deferral trends.

Obviously for pretty much every consumer lending asset class <unk>.

A percentage of accounts in some sort of deferral program.

Sometime in late April or maybe can you give us a sense for.

How that's trended throughout the quarter in maybe.

Some context of maybe a year ago sort of what the typical percentage.

Accounts are that are in.

Some type of forbearance.

Okay.

Sure. So we like we always do work with customers that are having difficulty making their payments.

Objective is to keep the customer in the vehicle. It's good for the customer it's good for us.

The reason, we disclosed that sort of the year over year changing cash collections.

And broke out the front end collections and it's really a simple way to see what how the pandemic is impacting.

Our results on a monthly basis. So if you look at those numbers. It tells a pretty clear story, we started out in January which is kind of your baseline January and February.

Results offered.

In March and April started to improve pretty dramatically in may and has continued through the end or through the last day. We gave you which is July 28.

Okay, and it art and I don't have those numbers right in front of me but are they.

Are they getting close to sort of pre pandemic levels the.

So I think it.

Right now, they're they're better than.

Pre pandemic level they are.

If you look at.

January February as your baseline, we're we're doing better than that I think the the asset side of that is we're very early in his other people pointed out there has been federal stimulus we have been enhanced unemployment theres no.

Certainly that that's going to continue or we don't know how long it will continue into the EBIT of it does so early innings.

Things are pretty good.

Thank you asked me back in March if I thought we'd be in as good a position I would have said note. So.

I'm pleased about that but also keep in mind.

Very very early in this is going to play out over a long period of time.

Got it and then.

Lastly, just in terms of.

Yes.

Well.

Pricing and overall returns.

Stop me if this is a too simplistic.

Way of looking at things, but instead of looking at all these different vintages.

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You know every every quarter I, just divide finance charges by your average balance for the quarter.

Ticket to get a gross yield.

Which is obviously debt level yield it.

It's kind of the average of all of the different static pool that you forecasted.

In Italy.

This quarter it looks like that I calculated the yield simple average.

It is 22.6%.

And it's actually that's the highest in about five or six quarters and.

Did you see anything.

Yeah.

Anything in the pricing environment, or just the demand environment or.

How much independent dealers are willing to accept in terms of hold back it is that accurate calculation directionally that.

You're forecasting your portfolio to generate higher yield whether it's no. It's not I think you probably noticed you took the gap the GAAP number right.

And so you got to remember with seasonal.

The gap finance charges are.

You know there there are higher than what our economic yield really is.

You have to start with the adjusted numbers and what you'd find there is just like you would expect when we reduced our cash flow forecast in March the yield drop.

And.

We got a portion of that back during the second quarter, but.

It's still lower than it was.

Three pandemic.

As if the.

Cash flow forecasts recovers the yield will recover over time and if it doesn't than the opposite but no. We're not we didnt.

The yield only increased for gap in the world of gaps.

But I wouldn't I wouldn't.

The difficult to figure out what the economics are if you're looking into two that loans right right. Okay. No. Thanks, a clarification, because obviously counter intuitive.

Thank you and stay well.

Your next question is from David Fowler from Wells Fargo. Your line is open.

Hey, good afternoon, I wanted to follow up on the prior question.

About just used car prices overall.

Yes, I assume those bounce around.

What do you guys thinking internally about used car prices for the year just seeing.

Number of different retailers and.

Players in the auto space.

There is different.

Estimates so I wanted to hear your view.

Well.

We don't have we don't really have they have a view but.

Okay and then.

I appreciate the you all the color on the month by month.

Changes and collections boasts both front end as well as total collections as you looked at the March and April data and the decline there.

Is there any way to think through how much of that was you know more driven by the auctions being closed versus just overall kind of collections on payments from customers.

And then another word.

The front end front end collections would would reflect payments from customers.

Total collections reflect all cash flows. So that's that's why we broke it out into two columns as so you could it lets us.

The differently.

Trends between those two numbers early we weren't selling cars at auction. So total auctions are gonna be impacted that doesn't impact front end collections, though so we broke that out separately. So you could see there.

Got it and the prior question, we talked about getting back to pre pandemic levels.

What are kind of the major driver there of the year over year growth.

So in January and February sales are affected because that was pre pandemic.

Through March April and.

May and you saw no the impact of the pandemic and then in June and July you see.

Better results no storm surely starting in May.

May June and July see better results, which likely reflects to some extent the impact of the.

The stimulus money in the enhanced unplanned benefits.

Okay.

Can you talk about regional performance at all and maybe.

Talk about where you have.

Higher exposures in terms of geographical.

Yes, no exposure.

And we.

We really aren't going to talk about anything beyond what we've already disclosed.

We have.

Our disclosed on our 10-K's, where our top five states are.

So you can.

Ill take a look at that.

Yeah ill draw some conclusions about what's going on from an economic perspective on all of those states but.

We're not going to disclose anything beyond what.

What's in the release and.

What will be in the 10-Q when it gets filed.

Okay and then just last question for me.

A decline in active dealers can you just talked about major drivers there.

You guys expecting any.

Ill.

No major overall changes in the industry in terms of dealer closures through the end of this year or maybe into 2021 or do you expect it to be more muted.

Yes, I think you saw the the active dealer count decline year over year this quarter.

Attrition was.

If you look at it in terms of the number of dealers attrition was about average maybe a little bit better than average.

Difference from prior quarters as we just didn't have as many new act as as we have had historically.

Part of that might be.

That our sales force was largely working from home.

But the other trends in new Actos and new actives per man haven't been great. They were declining before the print that endemic.

You do see you saw a continuation of that.

In the second quarter, our worsening of the second quarter.

Probably partially related to the.

The fact demands were working other house.

Okay, and then any thoughts on the industry overall, whether you'd expect more significant dealership closures.

No I think it's I think it's hard to forecast that.

Okay. Thank you for the thanks for taking the questions.

We have any follow up question from machinery Orange from credit Suisse. Your line is open.

Thanks.

Maybe just talk a little bit about the competitive environment.

You see it at this stage in terms of.

And.

The ability to kind of.

Originate and what you're doing.

Sure It was difficult as you know before the pandemic started.

There was maybe some.

Thought that.

You know cat capital might drive for the industry that Didnt happen. So you have lots of capital.

All the same competitors or are out there that were before the Pandemics I think you can expect it to return to a fairly competitive state.

Got it and you had mentioned before that unemployment doesnt factor into the models, but does unemployment factor into your ability to kind of originated loan likely you originate loans to someone who.

Is not employed or is employing furloughed.

Historically when.

We go into an economic downturn.

We've done very well from a demand perspective.

Whether that will happen again, who knows.

But but typically that that hasn't been the concern.

But this is a little bit different and they have an economic downturn, we have lots of capital available. So we'll just have to see our plays out.

Okay.

[noise] [noise]. Thank you no further questions in the queue I would like to turn the conference back over to Mr. robust for any additional my closing remarks.

We'd like to thank everyone for their support and for joining us on our conference call today.

You have any additional follow up questions. Please direct into our Investor relations mailbox at IR credit acceptance Dot com.

We look forward to talk to you again next quarter. Thank you.

Once again this concludes todays conference we thank you for your participation.

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