Q3 2020 Credit Acceptance Corp Earnings Call
Good day everyone and welcome to the Credit Acceptance Corporation third quarter 2020 earnings call today's call is being recorded and webcast and transcript of today's earnings call will be made available on Credit Acceptance website at this time. I would like to turn the call over to Credit Acceptance Chief treasury officer. These are non Musk.
Thank you. Good afternoon. And welcome to the Credit Acceptance Corporation third quarter 2020 earnings call as you read our news release posted on the investor relations page 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 actual results to differ materially from those 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 those and other risks and uncertainties. Additionally. I should mention that to comply with the SEC regulation G. Please refer to the financial reserve.
section of our news release
Which provides tables showing how non-gaap measures red soil to gaap measures at this time Brett Roberts our Chief Executive Officer, Ken Boothe our Chief Financial Officer, and I will take your questions.
Ladies and gentlemen, we are about to start the question and answer session to ask you a question, please press star one on your telephone to withdraw that question, press the pound key, please send by email only compile. This is Amir Oscar.
Your first question comes from the line of John Rowan from Genie your line is now open. Good afternoon guys.
Have have you guys made any changes to capture recently regarding how the unit prices are our input into the system?
Not sure what you're referring to specifically. What do you mean? I mean are the dealers allowed to you know are the prices for the cars in caps bowing to the advertisements that you know, the dealers are are putting out.
The prices and cats come from the dealer. So for the most part we get a feed from their DMS that supplies the selling price.
Okay, we haven't made any changes recently to the the ability for that dealer to change the price of caps.
I don't know what you mean the price of caps. Well the price of the car with when they're when they're submitting the loan application for the client.
No, the feed comes from the DMS the dealer supplies us with the selling price and cap starts with the selling price at the dealership are okay. I was a little surprised to see the rejection in you know dealer partner units. Can you talk a little bit about the the reduction in the you know, the dealer partner, you know, obviously, you know, I would have thought competition would have been a little bit weaker this quarter. Maybe just go over the competitive, you know the competitive environment and why you know, there was a little decline in the average dealer partner of productivity.
I would just point you to the to the reasons that we gave in the release. He had wholesale prices increase and all of that changes the retail price that the dealer has to offer the car for so our customer at the lower end of the credit Spectrum. You'll probably get squeezed out when there's a sharp increase and and wholesale prices that's only one aspect of it you have, you know, the other things we've mentioned in the release, but the same payment and the unemployment benefits.
Okay.
Thank you very much.
Your next question comes from the line of most are in back from credit Swiss Airline is now open maybe just keeping on the same theme is that I mean is that the reason that this started I guess before the stimulus payments while the stimulus payments were still being received by anyone who was unemployed.
When you say this started working for the client, I guess the the decline in volume, you know, you kind of gave their the you know, the monthly income monthly volumes and you saw you know, the biggest declines in the last four months started, I guess in July while the stimulus payments were still being received.
Yeah, it's partly speculation in the obviously March and April were down may-june responded strongly. July was a bit of a transition month and got the three weeks or months in a row the two last month. So to 3 and then again in October, so we and the release we gave it our best shot at why we think you're seeing the numbers that we're seeing. But if you have other other theories, that's that's fine as well.
Right, right. I mean is there anything that you know that you would think that's happening in in the environment that would make that, you know, either turn around or or you know get wage like what what do you see as you know what's going on kind of since then? It's what it require a reduction in wholesale prices or are there other strategies that you've got to take care of that?
Not not near-term. I mean no reason to release of through, you know through the 28th. So we don't have anything beyond that that we that we know about the we didn't disclose but you know, the long-term strategies to continue to make the culture better and continue to make the product better and over a long period of time that's been successful. So we're not going to change that strategy.
Anything that you could talk to that you do in the interim to to mitigate that impact or does it just kind of roll through?
It depends on what happened. So, you know, we will have to see.
Yeah, we've got a long history of growing dealers and and growing unit volumes over a long period of time doesn't happen. Every quarter doesn't happen every month. But you know, the long-term trajectory is good. So I'm like I said, we're just going to stick with the same strategy.
I guess the you know, it's it's likely that at some point in the near future. You'll see some return, you know, return of some amount of stimulus package. Do you have thoughts as to whether that's enough to to qualify the borrowers for the car at these prices or just is it you know, is it just going to have to wait until they used car prices normalized or more?
I think
Both of those things will help if wholesale values come down. I think that will help if it's if they're stainless that will help as well.
Okay. Thanks.
Your next question comes from the line of Kyle Joseph from Jefferies.
Hey, good afternoon. Thanks for taking my questions. I just noticed the dealer loan unit volume increased as a percentage of the total origination is that specifically drove that and is that a trend you would expect to continue in the current environment?
I mean it was up a couple percentage points not material change in the grand scheme of things don't happen to have you know any expectations for whether that Trend will continue or or not in upcoming quarters.
Got it. And you know obviously credit was very strong this quarter. You're given lower gross charge-offs as well as elevated residual values and and not surprisingly your your forecast in collections improved. I would just ask, you know, what what sort of macro assumptions are baked into those with their be ongoing stimulus with the what's your outlook for residual values going forward?
Yeah, so that question or a similar question was asked, you know in the at the end of the first quarter and if you if you go back to the transcript of that call and what we told you was the you know, we have our McCartney forecasts that looks at historical data for similar loans and then forecast based on historical data and in q1 the forecast on the mechanical forecast declined by roughly forty million dollars. We then on top of that given the pandemic added another hundred six million. I'm talking about net cash flows here, uh and and reduced overall forecast by the by the total those two numbers roughly two hundred billion. And so last quarter get the same question. What we said is that we we haven't changed the subjective part of it, which is that larger number of 160 million. So we we are doing it we're running the mechanical forecast and then
On top of that. We have the subjective adjustments. It's meant to consider the macro-environment. So against ain't answering Q3. We haven't changed anything with respect to the subject of peace and the positive role podcast change you see in Q3 relates to the mechanical piece.
Got it. Thanks for thanks so much for answering my question.
In terms of recovery values or you know used car prices, you know, those are pretty small portion of our overall Cashflow stream. So whatever you end up assuming it doesn't really move the needle all that much.
Understood. Thank you.
Once again, if you would like to ask a question, please press star one on your telephone keypad. Your next question comes from the line of research your line is dead.
Hi guys. Just wanted to get some more color on the active dealer account. What was behind the decline there? And what's your outlook from here? Do you think that could return to growth? So they I mean he actually asked both both elements were soft. This quarter would be saw higher attrition and continue the trend from the previous owners were not signing up as many dealers as we did in Prior years. So the dealer council is really a function of those two variables.
Okay. Is there anything that you can point to you specifically behind the higher attrition rates in the quarter?
You know, it would be speculation but it would be you know, the the same things we listed in the release affect just like the effect by an overall they affect the number of the dealers.
Okay, thanks. And then you know, yeah that makes sense. And in the past you've you've made changes to things like the dealer enrollment fee and Salesforce incentives. Can you give us an update on the progress that those changes have made and are there any other levers you might have to spark some more growth?
Hopefully are against it gets back to the strategy the volume but it reflects some of these macro factors external factors. But you know Altima it's going to be a function of how valuable we can make our products and so it's we're focused on doing is if we have a valuable product that I'm sure that will have some growth in the future and just our future success just depends on our ability to continually improve our product.
Okay. Thank you.
Your next question comes from the line of Vincent from Stevens, you're lying is not open. Hey, thanks for taking my questions. First question on the on the financing that you are able to book. So understanding that counts are down and and maybe competition or used car prices is is pressuring you but if on the loan off your booking, is there any differences than loans that you were booking previously or pre covet so thinking for example, the quality of the customer the quality of the car off or the stipulations or anything else that might be different.
Well recent origination have continued a you know, trend of financing a more expensive vehicle for a slightly longer-term. So that's a continuation of a trend that's existed for a very long time. We've seen, you know a little bit of off of changing FICO score. If you look at our disclosure in the 10-q, you can see that you know, that number has changed a little bit. So the you know, the average psychos moved up a bit, but it's not, you know, not real material overall.
I think the biggest.
All the biggest thing is just the continuation of the the vehicle term Trend that I mentioned.
Okay. Got it. Thank you and noticed you didn't buy any stock today or this quarter. End of just wondering, you know, what the stock price having dipped down a little bit and I'm not sure if any of the if litigation or anything else kind of keeps you on the sidelines, but if you know if the portfolio is shrinking or demand is Flowing just sort of wondering if you could use your capital in other ways such as buying back your stock or other forms of capital return. Thank you.
I mean, you know, we've certainly bought back a lot of stock over a long period of time reduced to share count from you know over with over 50 million to 17 and 1/2 million. So certainly historically we've been operative opportunistic share purchasers and expect that would continue in the future.
Okay, great. Thank you.
Your next question comes from the line of credit back from credit with your line is now open great. I just wanted to follow-up you had mentioned that the the, you know, the you didn't take an overlay adjustment, but that the reversal of the reserve was just looking at the actual performance. I mean, how should we think about you know, cuz obviously most of that. Included, you know times in which the borrowers, you know were receiving that stimulus you now have more of a you know extended period of time haven't and how should we think about it, you know, either if there is, you know, additional stimulus at some point in the future or if there isn't I mean how you know, how should we think about that that behavior?
Yeah, I think we'll press what we have to what we see in the portfolio. So intuitive lead if there's more stimulus that's going to help but you know, it's hard to break adjusment based on the size of the the stimulus. So we'll just look at the performance of the portfolio and you know, like they said that it adjustment that were making of the forecast continues the one that we put in place in q1 at this point, you know, the the actual performance has been better than we would have expected when we put that in just been in place. So if it continues home of the ultimate forecast in collection rates going to be the same no matter how we forecast it right when you get to the end. That's the number that you're trying to forecast now, so if if things continue on a positive way, then the the forecast will gradually move up over time.
If they don't that's why we have the adjustment in place and obviously if they get worse will have to make a larger address.
Okay. Thanks.
Your next question comes from the line of Randy Heck from good now investment in line is not open.
Thank you Brett. I missed the first couple of minutes of the call. So I apologize if this was asked but if they've been pricing changes this year postcode adore wage cold it did you tighten pricing or since that time to be made any changes to pricing?
No change to the strategy with respect the pricing. We're trying to optimize the amount of economic profit that we generate. We typically try to stay away from specific discussions about you know, which pricing changes we've made and when what you can get a probably a reasonable feel for that if you just look through the disclosures there and if you if we make pricing changes that they show up in June disclosures related to the average loan.
Right. Okay, cuz I was wondering if that perhaps has had an impact on you to volumes.
It's if there were changes to stay away from specific discussions about pricing strategy. Okay, and then a week or so ago you now the largest deal in the the history of six hundred million. I think it was at the lowest cost 1.8% was that opportunistic or lack of why the why that large of an ABS deal of your unit volumes are have been weaker.
There was an opportunistic element to it. You know, you've got a unique situation in the ABS markets where I you know base rates are very low and you know credit spreads are pretty attractive and the you know, the combination of the two results and in in obviously very localized not answering. So those a little bit of an opportunistic element to it. It was a the third deal we've done this year. If you look back at you know prior years, that's our normal Cadence so long it isn't like we were, you know doing a deal that we you know, historically wouldn't have what was what was unique is just is just the size.
Okay. Okay. Thank you.
With no further question on Q. I would like to turn the conference back to mister Busca for any additional or closing remarks.
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 Credit Acceptance. We look forward to talking to you again next quarter. Thank you.
Once again, this concludes today's conference call. We thank you for participation.
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